Managing climate risk through green corporate bonds

Purpose This study addresses a notable gap in the existing literature concerning the long-term impacts of climate risks on financial markets. Its primary purpose is to examine the dynamic connectedness and spillovers between aggregate national climate risk and corporate green bonds in Greece. Design/methodology/approach We develop two main theoretical hypotheses to distinguish between the short-term and long-term periods of climate risk impact. To empirically investigate the connectedness and spillovers between the Greek Green Bond Index (GGBI) and disaster days (DISADAY), we employ a Bayesian Vector Autoregression (BVAR) model, which is well-suited for analyzing dynamic interactions in our dataset. Findings Our analysis yields significant results. We identify a time-varying causal relationship from aggregate national climate risk (DISADAY) to the Greek Green Bond Index (GGBI). Crucially, the lags of DISADAY significantly affect GGBI, confirming our theoretical hypotheses. Specifically, DISADAY exhibits a significant positive short-term impact on GGBI, suggesting green bonds offer immediate climate risk reduction benefits to investors. Conversely, a significant negative long-term impact is observed, indicating that green bonds alone may not be adequate for sustained climate risk management. These findings signal short-term benefits for investors but underscore the need for policymakers to adopt comprehensive strategies for effective long-term climate risk management. Originality/value Our study uniquely examines the dynamic interplay between directly observable aggregate national climate risk (via ‘disaster days') and the nascent Greek corporate green bond market. This unique focus on a highly climate-vulnerable nation with an emerging green finance landscape offers novel insights into short-term investment benefits and critical long-term policy needs, differentiating our findings from broader global studies.