Goal-oriented preferences for green bonds: A model of sustainable investment strategies

An Chen, Yusha Chen, Thai Nguyen and Gazi Salah Uddin

Economic Modelling, 2025, vol. 150, issue C

Abstract: Addressing climate change requires a transition to low-carbon, climate-resilient investments, with green bonds gaining traction among institutional investors focused on sustainability objectives. This study models their decision-making by integrating green investment targets into utility functions, combining a constant relative risk aversion (CRRA) component with a goal-oriented utility modification. Employing a Lagrangian approach, we derive the optimal terminal wealth and portfolio composition, including green bond allocation. Contrary to common intuition, more ambitious green investment targets do not always yield greater green bond allocations. The outcome significantly hinges on investors’ risk aversion. This intricate interaction between risk aversion and goal-oriented utility reveals the complexity of green investment decisions.

Keywords: Portfolio planning; Green investment target; Utility gain; Utility loss (search for similar items in EconPapers)
JEL-codes: G11 G22 G41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:150:y:2025:i:c:s0264999325001233

DOI: 10.1016/j.econmod.2025.107128

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