Green halo

Sustainability - sustainable finance - pricing - cost of capital - halo effect.

A green halo is a theoretical benefit enjoyed by an organisation or sector from green activity or signalling, outside the immediate scope of the activity itself.

For example, benefits resulting from related reputational improvements.

Green halo might lead to lower cost of capital for green bond issuers

"...green bonds may provide additional indirect benefits for the issuer.

For instance, by highlighting the environmental credentials of an issuer, green bonds offer a marketing benefit, potentially lowering the firm’s cost of capital by attracting new investors, or potentially improving business performance by attracting new customers.

This hypothesized indirect effect is called the green halo...

The argument for issuing green bonds to capture a green halo can be situated within the theoretical context of signaling problems.

Firms possess asymmetric information about their environmental credentials, such as future plans to reduce emissions. If this information is not or cannot be communicated effectively to investors with a preference for sustainability, firms may suffer from suboptimal costs of capital.

Issuing a green bond may serve as a (potentially costly) solution to address the signaling problem and achieve a more optimal capital cost."

The Green Corporate Bond Issuance Premium - International Finance Discussion Papers 1346 - Board of Governors of the Federal Reserve System - 2022, p7-8.

A treasurer's perspective

A green halo isn’t something to wear on your head. In treasury and finance, a green halo is an example of a halo effect.

Halo effects are when an impression formed in one part of our organisation’s activities, carries over indirectly into other areas. Especially a favourable impression, when we are seen to do something positive and verifiable. Green halo effects can arise from a substantive activity – or a significant signal – relating to our environmental credentials.

The Federal Reserve has suggested green halo benefits might be one reason – among other good reasons – for organisations to consider issuing a green bond.

• read the disclaimer on a treasurer's perspective

See also

• Asymmetric information
• Bond
• Cost of capital
• Emissions
• Federal Reserve System
• Green
• Green bond
• Green curve
• Green finance
• Green gilt
• Greenium
• Halo effect
• Issuance
• Issuer
• Optimal capital structure
• Premium
• Reputational risk
• Signalling
• Sustainability
• Sustainable finance

External link

• Caramichael, John and Andreas Rapp (2022) - "The Green Corporate Bond Issuance Premium," International Finance Discussion Papers 1346. Washington: Board of Governors of the Federal Reserve System