This paper analyses, from a theoretical and empirical perspective, how the exchange rate volatility of the currency of denomination and the degree of financial openness of the market of issuance influence the yield differential between green and equivalent brown bonds. Estimates are based on a dataset of bonds issued during the 2014-21 period on the global market.
All things being equal, green bonds have lower yields than conventional brown bonds. The difference is smaller for bonds denominated in highly volatile currencies against the US dollar and for those issued in financial markets that are more closed to foreign investors. Therefore, this paper offers a possible explanation for the higher financing costs of green projects in many emerging economies compared with advanced countries.
