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.
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
