Green bond: the emperor wears no clothes

“Green” finance has marketed green bonds as a tool to finance projects with environmental benefits. As internalizing a negative externality amounts to paying an additional cost (such as the costs of depollution for example), the usefulness of the bond is based on the assumption that this additional cost would be, at least partially, transferred to bondholders – the buyers of green bonds – thus making finance contribute to the common good. This assumption is unrealistic. We show this in a simple way by explaining how the mechanics of the primary bond market forbid it when professional investors participate in the placement of green bonds. For such (non green) investors, the fact that the green bond is not contractually different from a traditional bond prevents them from giving it any singular value. This in turn necessarily means that the rate of return on a green bond cannot be lower than that on a traditional bond (all other things being equal). In conclusion, the green bond cannot constitute an incentive to carry out a green project.


Ivar Ekeland was research associateof the Chair Energy and prosperity from 2016 to 2019