GREEN BONDS VS. TRADITIONAL BONDS: A RISK-ADJUSTED PERFORMANCE STUDY

Abstract

The appearance of green bonds as the specific category of fixed-income instruments signifies the changes in the world towards sustainable finance and environmental, social, and governance (ESG) investment policies. Green bonds, unlike conventional bonds, are specifically allocated to the projects which benefit the environment, so their funds are used to finance clean transportation, renewable energy, water management, and climate adaptation efforts. Although the existing literature confirms the fast-growing pace and rising significance of the green bond market, it is still arguable whether the green bond is providing a similar or higher financial performance compared to non-green bonds after taking risk into consideration. This paper will undertake a risk-adjusted performance analysis of green bonds and conventional bonds in terms of major financial metrics in a multi-year time frame. With the aim of determining the competitive returns and diversification opportunities of green bonds in fixed-income portfolios, the empirical assessment and analysis of yield returns, volatility, Sharpe ratios, and correlation structures are applied. Findings suggest that despite having a comparatively small difference in average yields, traditionally bonded funds will be less volatile, higher risk-adjusted returns with a smoother price movement, which will be more desirable to ESG-appropriate and risk-averse investors. The results endorse the idea that green bonds may be efficient risk-reduction instruments on diversified portfolios as well as achieving sustainability purposes.