Understanding the Relationships between Environmental and Social Risk Factors and Financial Performance of Global Infrastructure Projects

Abstract

This study analyses the link between environmental and social risk (ESR) factors and the risk-return profile of infrastructure bonds. We provide support for the hypothesis that credit standing of infrastructure bonds is associated with ESR factors. Considering these factors along with bond and issuer specific information we discovered that several environmental and social risk covariates are strongly related to 1) expected risk-return profile of infrastructure bonds; and 2) the balance of risk around the expectation. Thus along with traditional drivers of bond risks (e.g. time to maturity, base interest rate, etc.) we find that also CO2 emission and percentage of independent directors emerge as important predictors. This study benefits from thoroughly developed, justified and validated non-parametric regression model used to derive key insights into the research question. This work makes a methodological contribution by applying non-parametric modelling techniques to study the financial risk of infrastructure projects. Moreover, it provides bond investors as well as policy makers with the guidance on where to focus their attention.