From risks to opportunities: The impact of green public investment programs on sovereign yields

We study whether markets are accounting for the positive impact of countries’ climate investments into their judgement about country risk, proxied by sovereign bonds’ yields. Using the introduction of the European Commission (EC) Recovery and Resilience Facility (RRF), launched in 2021, as a natural experiment, we use a staggered difference-in-difference model to analyse the market pricing of the greenness of EU member states’ Recovery and Resilience Plans (RRPs). We find that the aggregate impact of climate investments in EU countries’ recovery plans on sovereign bonds is yield-reducing, and increases with longer residual maturity of bonds. • The European Commission introduced the Recovery and Resilience Facility in 2021. • Sovereign yields decreased after the EC endorsed the national spending plans. • The decrease was driven by the share of the plans devoted to climate objectives.