Drivers of Green Bond Market Development: The Importance of Nationally Determined
Contributions to the Paris Agreement
Clarence Tolliver, Alexander Ryota Keeley, Shunsuke Managi
1. Introduction
The Paris Agreement under the United Nations Framework Convention on Climate Change calls tokeep 21st century global temperature rises within a 2° Celsius threshold and to finance low-carbon, climateresilient global development. At the core of the agreement are the Nationally Determined Contributions(NDCs), which are country-specific pledges to reduce greenhouse gas emissions and adapt to climatechange impacts. The compatibility of green bonds with NDC investment targets and the massive upscaling
in global green bond market activities suggest that green bonds are issued as an avenue for firms to financeprojects and assets conducive to Paris Agreement objectives. The objective of this study is to investigate
how NDCs and conventional bond market drivers affect green bond market capitalization.
2. Methodology
In order to examine the determinants of green bond market issuances and the relationships between
those determinants, explanatory factor analysis (EFA) and structural equation modeling (SEM) is employedusing panel data for 46 countries and 10 supranationals that issued green bonds from 2007 to 2017. Inaddition to the inclusion of seven observed (trade freedom [TQ], regulatory quality [RQ], rule of law [RL],
trade openness [TO], gross domestic product [GDP], stocks traded [ST], and OECD-membership [OECD])
and two latent variables (Institutional and Macroeconomic) based on previous literature, an original NDC
variable is added to the analysis using values calculated from a uniquely constructed index of NDC
robustness for each country in the scope of assessment. Then the following five hypotheses built upon
findings from existing bond market literature are tested using SEM: 1) macroeconomic factors positively
influence green bond issuance volumes; 2) institutional factors positively influence green bond issuancevolumes; 3) OECD membership positively affects green bond issuance volumes; 4) robust Nationally
Determined Commitments (NDCs) positively affect green bond issuance volumes; and 5) countries withhigher quality institutional and regulatory environments have better macroeconomic conditions.
3. Results
13 of the 15 paths portrayed 99% statistical significance. The path from OECD to GBVOL, as well as
the path from Institutional to GBVOL, were the two statistically insignificant exceptions. The -0.093 pathcoefficient for Institutional and GBVOL, though uniquely small and negative, is unlike each of the othercoefficients with Institutional in that it is statistically insignificant.

The Macroeconomic latentvariable

displayed

a0.49

coefficient with NDC, and a 0.15
correlation with OECD in thismodel.

Italsocoefficienthadwitha0.51

GBVOL,

portraying it as the variable withthe largest magnitude of direct
effects on green bond issuancevolumes in this model. Moreover,
NDC showed a 0.19 correlation
coefficient
depictingwiththeGBVOL,

largestsingleexogenous variable impact on green bond issuances.
Proven to be statistically significant, the NDC variable
has the second largest direct impact out of the four
direct impacts assessed in this model. Furthermore, the0.045 path coefficient for OECD and GBVOL reveals that OECD membership was not a coercive
determinant of green bond issuances. Finally, model fit is supported by acceptable values of Satorra-Bentler
comparative fit index (CFI) and Tucker-Lewis index (TLI), as well as those for the standardized root meansquare residual (SRMR) and coefficient of determination (CD).
4. Conclusions
As hypothesized, both macroeconomic and institutional factors promote green bond issuance volumes.
The former had the largest, positive, significant direct and indirect effects on green bond issuance volumes.
This shows that the importance of macroeconomic factors to green bond market capitalization to be similar
to their importance to conventional bond market growth that has been established in previous literature.
The considerable, statistically significant indirect of the latter similarly suggest the importance ofinstitutional factors in green bond markets.
The results also revealed a substantial, positive, statistically significant impact of NDC robustness ongreen bond issuance volumes. Indeed, the strength of NDCs exerted the largest impact on green bondissuance volumes of any single exogenous variable, accounting for nearly half of the direct impacts exerted
by macroeconomic factors. This implies that as countries renew and strengthen their NDCs in pursuit ofclimate change mitigation and adaptation, they will rely on green bond issuances of larger volumes.