Green bond home bias and the role of supply and sustainability preferences

Using nascent euro area green bond markets as an experimental set-up, we are able to show that home bias is a universal phenomenon. Exploiting dynamics around the scarcity of an asset class, we show that investors tend to turn to their domestic market as soon as their home market becomes available. Moreover, investors’ home bias slowly increases further as the domestic market develops, even if these investors have previously acquired sufficient information about the non-domestic market through investing abroad first. Using confidential bond-level holdings data of euro area investors between Q4 2013 and Q3 2021 in combination with green bond labels, we document that home bias in the euro area bond market is currently lower than in conventional bond markets. Green bond home bias increases over time, however, as investors revert back to their home market as soon as (more) green bonds become available domestically. Moreover, banks’ sustainability ambition drives cross-border green bond investments, although the results are heterogeneous across countries and the beneficial impact of banks’ sustainability ambition on green bond home bias dissipates quickly once banks’ domestic green bond market grows.

Keywords: home bias; sustainable finance; financial integration; green bonds; banks; capital markets
JEL codes F15; F36; G15; G21; G23; G28; Q54

Working paper no. 767