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New Time-Dependent Risk-Return Tradeoffs from CBI Certified Municipal Bonds

Carolin Schellhorn
The Journal of Investing ESG Special Issue 2020, joi.2019.1.111; DOI: https://doi.org/10.3905/joi.2019.1.111
Carolin Schellhorn
is an assistant professor in the Department of Finance at Saint Joseph’s University in Philadelphia, PA
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Abstract

Forced to address human-induced climate change, the world has embarked on the transition to a low-carbon economy, requiring massive amounts of financing. Municipalities in the US have begun to issue bonds that are third-party certified and registered with the Climate Bonds Initiative (CBI) to attract funding for much-needed climate-related infrastructure. As this market is developing, borrowers and lenders are assessing the potential for new risk-return tradeoffs over time. Variations in the pricing of CBI certified municipal bonds with different terms to maturity likely depend on the extent to which climate-related projects are expected to be prioritized in fund allocations to correspond to increases in public attention to the dynamics of climate change. As the pricing of time-dependent climate-related risks progresses, the market for CBI certified bonds promises to become an efficient funding mechanism for communities grappling with climate risks while expanding the menu of risk-return choices for investors.

TOPICS: ESG investing, risk management, fixed income portfolio management

Key Findings

  • • The yields of municipal bonds that are certified to address the risks associated with climate change appear to decline relative to the yields of comparable conventional bonds with lengthening maturities.

  • • The dynamic nature of the climate risks and the public’s growing willingness to prioritize climate-related projects are likely factors in the bonds’ time-dependent pricing.

  • • This emerging market segment may develop into a valuable funding mechanism for climate-conscious municipalities while expanding the menu of risk-return opportunities for investors.

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The Journal of Investing: 30 (2)
The Journal of Investing
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New Time-Dependent Risk-Return Tradeoffs from CBI Certified Municipal Bonds
Carolin Schellhorn
The Journal of Investing Nov 2019, joi.2019.1.111; DOI: 10.3905/joi.2019.1.111

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New Time-Dependent Risk-Return Tradeoffs from CBI Certified Municipal Bonds
Carolin Schellhorn
The Journal of Investing Nov 2019, joi.2019.1.111; DOI: 10.3905/joi.2019.1.111
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  • Article
    • Abstract
    • A TIME-DEPENDENT FINANCIAL RESPONSE TO CHANGING CLIMATE RISKS
    • ARE THERE TIME-DEPENDENT DIFFERENCES IN THE PRICING OF CBI CERTIFIED BONDS?
    • CHANGES IN THE PUBLIC’S ATTENTION TO CHANGING CLIMATE RISKS
    • CBI CERTIFIED BONDS AS SIGNS OF MUNICIPAL RESOLVE
    • RESULTS FROM AN EXPANDED SAMPLE
    • CONCLUDING REMARKS
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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