Investment of Institutional Investors in Green Bonds - Financing of Sustainable Development and Optimization of the Investment Portfolio

Abstract

This chapter analyzes institutional investors' investment in green bonds, focusing on sustainable development financing and portfolio optimization. The research aims to explore the risks and potentials of investing in green bonds by analyzing the regulatory framework, previous research, and market trends. Special attention is given to portfolio optimization through integrating bonds issued according to ESG standards using Markowitz's diversification model. Secondary data sources include the Climate Bonds Initiative and the S&P U.S. Municipal Green Bond Index. The results show that the average returns of green municipal bonds are slightly lower compared to conventional municipal bonds in the period from mid-August 2016 to mid-July 2023, but this difference is not statistically significant. This indicates the absence of a green premium or discount for green bonds, aligning with the literature's stance that these bonds do not enjoy particular advantages or penalties in the market compared to conventional bonds. The integration of green bonds into investment portfolios demonstrates a positive impact on returns, risk management, and overall portfolio efficiency, providing significant insights for institutional investors.