Smart Prosperity’s Research Network conducts world-class research focused on a stronger, cleaner economy. This Spotlight Series highlights the activities of faculty and student researchers alike, showcasing the breadth of expertise and activities of our Research and Student Networks.
In this edition, we caught up with Olaf Weber and Vasundhara Saravade. The team was awarded funding through Smart Prosperity’s 2020 Call for Research Proposals for their project titled “Behavioural Finance and Green Bonds: Drivers and Barriers for Investors to Invest in the Green Bond Market“.
Olaf: The big question is how to motivate investors to invest in a green transition. Green bonds are one financial instrument that might help to finance the green transition. However, we need to know what the impact of these bonds are on sustainable development and how they can attract investors.
Vasu: Given the urgency of climate action, we are trying to understand what is motivating investors and companies nowadays to redirect their investments and switch to a green strategy. Based on research, we know that people are prone to behavioural biases in their decision-making, and their perceptions are usually influenced by information and how it gets presented. So, some of the big questions we are asking through this research project are: What kind of behavioural biases and heuristics exist in the green bond market? What is driving investors to switch their strategies to being green? What kind of barriers exist for those that are not yet doing so? We hope that our research is able to answer some of these interesting questions and can in turn help inform those that are able to make key decisions related to the transition towards a low-carbon economy.
Olaf: China has integrated environmental performance indicators into financial supervision. For instance, lenders have to submit key performance indicators that show how much they lend to green clients compared to non-green clients. Other countries, such as the UK have started to establish the Task Force on Climate-related Financial Disclosures indicators as mandatory for the financial sector. China’s example is quite successful and resulted in increased green lending as well as reduced financial risks. We also learn that environmental indicators might be helpful for financial supervisors.
Vasu: Given how great the demand is for a reliable framework for a successful transition towards the low-carbon economy, we think having some sort of evaluation in place can be a good starting point for investors and governments to figure out what is a viable course of action. Country and regional taxonomies as well as industry standards like the Taskforce for Climate-related Financial Disclosures are a great example of some form of evaluation already being practiced across the world. But specific financial products like green bonds are still evolving and need more mainstream buy-in from governments and investors to have universally accepted frameworks in place. Sometimes this buy-in can be based on additional factors like environmental benefits that are provided by green bonds. That is why having evaluation frameworks, whether in the form of life cycle assessments or climate-based risk and behaviour frameworks, could be useful tools to help assess whether the green bond market is truly effective in addressing climate action.
Definitely. It helps to view research problems from a different point of view. Researchers are usually happy if they can solve their research problem. However, often we have to think about how we can implement our findings in real-life situations. Sophisticated tools developed by academic research might be too expensive or too complicated to be useful for professional applications. Hence, I think it is important to start research–industry partnerships around a research question of interest. The main questions should already be aligned with industry needs if the goal of the research is to create applicable results.
As a doctoral candidate in a mostly male-dominated field like finance, I think having early-career mentorship can be a great way to nurture more diversity and accessibility in academia. I have been fortunate enough to have amazing mentors (like Olaf) all throughout my academic life, who have really pushed me to excel and go out of my comfort zone when required. I think more women empowerment networks are needed in academia (and also in other industries), not only to add out-of-the-box thinking but also bring a sense of balance to the traditional method of doing things. That is why I founded the WWLA mentorship network this year, with the hopes to foster this sense of community at the university level and ultimately support more peer- and faculty-mentorship opportunities that can inspire the next generation of women academics.
I have loved the experience of being the student voice on the Editorial Board for Smart Prosperity: The Podcast! It has been very enriching to hear different perspectives – ranging from non-profit to policy to journalism – from other Board Members on various green economy topics. As someone who is also an academic researcher in this field, the podcast has been a great way to share interesting research in a relatable way. Connecting green economy topics to the day-to-day events happening in Canada and around the world is really made worthwhile as more people get involved. It turns something like climate change and the future, which can seem so complex and unknown, into an important value and an exciting time to be in.
Olaf: One big topic is to make climate-related and other sustainability indicator reporting mandatory. The question, however, is which standards should be used and how we can assess performance based on the indicators. This is something I want to understand better. Another topic is finance and water. I think water and biodiversity are the next big issues in sustainable finance after we have created more insights on climate finance.
Vasu: The next thing I’ll be doing is working on a life cycle assessment of green bonds to see if they provide additional environmental impact. After that, we are hoping to run an exciting behavioural experiment to see if the findings from this research project can be generalized to behavioural finance.
Once my PhD is finished, it would be great to work in academia, and collaborate more with government and private sector on green bonds and other sustainable finance-related tools. The next frontier to study in research is the innovative green financial products and policy tools that will be created over the coming years, and to understand how countries respond or react to encourage their low-carbon economic transition.
Thank you Olaf and Vasu!