“The Optimal Design of Green Debt Securities”
With the Lunch Seminar series, the Department of Finance is bringing eminent and up-and-coming researchers from around the world to Luxembourg.
Abstract
We develop a theory of optimal security design for financing green investments in the presence of greenwashing (i.e., when reported green outcomes can be manipulated). The model embeds key features of green investments, such as the uncertain nature of green outcomes and the variation in the strategies to deliver them (i.e., tangible projects vs. behavioural changes) into a principal-agent setup in which an investor with green preferences employs a profit-maximizing firm to produce a green outcome. We show that the optimal contract includes a payoff component that depends on the implementation of tangible green projects (i.e., a project-contingency), and a compensation that depends on the reported green outcome (i.e., an outcome-contingency). The more severe is the level of greenwashing, the more relevant is the project-contingency component to ensure efficient project implementation, and in the limit where manipulation is highly likely, only contracting on projects is possible. The optimal contract nests the two broad categories of contracts currently present in the market, namely green bonds (GBs), that focus only on pledging proceeds to finance specific green projects, and sustainability-linked bonds (SLBs), that do not impose restrictions on the use of proceeds but instead make the payoff entirely dependent on reported green outcomes. Our model rationalizes several empirical facts.
About the speaker
Adelina Barbalau is an Assistant Professor of Finance.
Language
English.
This is a free event. Registration is mandatory.
Cold lunches are provided to registered participants.
In partnership with
Supported by the Luxembourg National Research Fund (FNR) 17984041