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ABSTRACT
A theoretical framework is provided for the innovative tool of green securitisation. We test the effects of this strategy on financing institutions' exposure to climate risk and their alignment with global climate targets. We also estimate bondholders' returns when they invest in these ‘green’ securities. We discuss the extent to which ‘green’ securitisation can be an effective strategy for climate risk management and a promising way to yield more resilient and mission-aligned financing institutions.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 PACE is an acronym for Property Assessed Clean Energy.
2 A dynamical model for the default probabilities should link them to the damage created by physical disasters, which in turn depend on the global average temperature. On the other hand, the creation of new green assets through securitisation reduces damages thanks to adaptation investments, which eventually abates the default probabilities of loans. This feedback effect creates a virtuous circle that deserves a specific investigation. We leave this complex issue to future research.
3 The level of c is fixed to compensate the default risk in the underlying portfolio, so that the total portfolio value remains unchanged over time. In other words, only a purely financial risk premium is modelled. A more realistic level of c should account for all costs related to the bank's operations and business gains.
4 In 2015, it was estimated that one third of oil reserves, half of gas and over 80% of coal reserves should be left in the ground to meet the global temperature targets under the Paris Agreement.