How Green Financial Instruments Mitigate Climate Risk: A Case Study of Build Your Dream's Green Bonds

Abstract

Climate change poses a significant risk to the global economy, including physical risks such as extreme weather and transition risks like carbon tariffs. The paper discusses Green financing, such as green bonds, as effective measures to address the risk associated with climate change through funding sustainable projects. This paper revolves around how Build Your Dream (BYD), a leading Chinese new energy vehicle company, leverages green bonds to mitigate climate risks. This study further analyzes BYD's climate exposure, details of its green bond issuance like "19 Yadi G1", and the mechanism through which these green bonds are set to reduce these risks. This research reveals that BYD suffers from physical risks at the production stage, and most of these risks result from changes in climate events and transition risks from carbon tariffs. Introduction factors such as low-carbon technologies, energy storage, and effective infrastructure have improved BYD's environmental performance, reducing financial cost and enhancing its market reputation. The Green bonds support low-carbon innovation, help it comply with carbon markets, and fund resilient infrastructure, ensuring its alignment with China's "Dual Carbon" goals (Carbon peak by 2030, neutrality by 2060). The research shows companies reacting positively to green bonds, as indicated by increased stock price and Environment Social and Governance (ESG) ratings for the certified bonds. The case study reflects how green bonds can manage climate risk while delivering financial and environmental benefits to the industry. The research recommends a stronger market in Canada and globally to support sustainable development.