I examine corporate green bonds, whose proceeds finance climate-friendly projects. These bonds have become more prevalent over time, especially in industries where the environment is financially material to firm operations. I show that investors respond positively to the issuance announcement, a response that is stronger for first-time issuers and bonds certified by third parties. The issuers improve their environmental performance post-issuance (i.e., higher environmental ratings and lower CO2 emissions) and experience an increase in ownership by long-term and green investors. Overall, the findings are consistent with a signaling argument—by issuing green bonds, companies credibly signal their commitment toward the environment.

We study biodiversity finance—the use of private capital to finance biodiversity conservation and restoration—which is a new practice in sustainable finance. First, we provide a conceptual framework that lays out how biodiversity can be financed by pure private capital and blended financing structures. In the latter, private capital is blended with public or philanthropic capital, whose aim is to de-risk private capital investments. The main element underlying both types of financing is the “monetization” of biodiversity, that is, using investments in biodiversity to generate a financial return for private investors. Second, we provide empirical evidence using deal-level data from a leading biodiversity finance institution. Our findings are consistent with a three-dimensional efficient frontier (return, risk, and biodiversity impact)—deals with a favorable risk-return profile tend to be financed by pure private capital, whereas for other deals the biodiversity impact needs to be sufficiently large for blended finance to be used. Overall, our results suggest that blended finance is an important tool for improving the risk-return profile of these projects, thereby increasing their appeal to private investors and crowding in private capital. Finally, our results suggest that private capital is unlikely to substitute for effective public policies in addressing the biodiversity crisis.

Blended finance—the use of public and philanthropic funding to crowd in private capital—has emerged as a potential tool for financing sustainable development. Yet little is known about the design of blended finance contracts. We develop a conceptual framework in which development finance institutions (DFIs) allocate concessional capital across projects to maximize societal impact while crowding in private investors. Our framework highlights a trade-off between sustainability impact and the amount of concessionality required to make projects commercially viable and characterizes how DFIs optimally combine different instruments, including concessional debt, junior equity tranches, and risk management facilities. We then provide empirical evidence on blended finance using deal-level data from a major DFI. Consistent with our conceptual framework, projects with higher anticipated sustainability impact receive greater concessionality. Moreover, concessionality is higher in countries with greater political risk and information asymmetries, and these projects are more likely to include risk management provisions. Our findings provide new evidence on how DFIs deploy catalytic capital to mobilize private investment in sustainable development.