What drives the performance and causality of green bond indices?

Abstract

This paper empirically assesses the performance of green bond indices and the causality of that performance using a range of financial and commodity data. We present new insights from the novel application of datasets, neural networks and performance measurements. We find that green bond indices do not outperform the market when factors beyond market return are considered. We find that Brent crude oil has the most significant effect on certain indices, a finding that contrasts with other studies on green bonds. A greater sensitivity to oil prices and global green equities also evinces a negative impact on a green bond index’s ability to outperform the market. For the first time, a linear causal relationship is established between Title Transfer Facility (TTF) returns and green bond index returns. Additionally, a fundamental shift in causal relationships is observed over the COVID-19 period. In this way, we contribute to the literature on sustainable green bonds and the impact of COVID-19. These insights provide more clarity to market participants for navigating the uncertainties of both the global energy transition and the postpandemic period.

KEYWORDS:

• Green energy
• Green bond indices
• Sustainability
• performance analysis
• causal inference
• neural networks

JELs:

• C45
• C58
• G10
• G15
• L10
• Q50

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 We run a series of tests with different cut-off dates from around September 2019 to March 2020 and January 2021 to October 2021; however, our results remain statistically unchanged. We also tested the remainder of the dataset and found no other breakpoints across the indices, and for brevity these results have not been included. The results are available upon request.

Additional information

Notes on contributors

Konstantinos N. Baltas

Dr Konstantinos N. Baltas is an Assistant Professor of Banking and Finance at Essex Business School of the University of Essex. His research focus in the fields of Banking, Financial Economics and Financial Intermediation. His current and ongoing research lies in the area of financial stability and prudential regulation, household finance and economic behaviour, corporate governance and risk, Fintech, Sustainability and Energy.

Robert Mann

Mr Robert Mann is a Senior Quantitative Analyst working in the Renewable Energy industry. His current and ongoing research lies in the area of long memory, causality and neural network modelling of Energy and Commodity markets.