Corporate Green Bonds

Abstract

This study examines corporate green bonds—i.e., bonds whose proceeds are committed to finance climate-friendly projects. I document that corporate green bonds have become more prevalent over time, especially in industries where the environment is financially material to the firms’ operations. I further document that the stock market responds positively to the announcement of green bond issuance. The response is stronger for green bonds that are certified by independent third parties and first-time issuers. Moreover, green bond issuers improve their environmental performance (i.e., higher environmental ratings and lower CO2 emissions) post issuance, and experience an increase in ownership by long-term and green investors. Overall, these findings are consistent with a signaling argument—by issuing green bonds, companies credibly signal their commitment towards the environment. As this commitment materializes, companies improve their environmental performance and become more attractive for an investor clientele that is sensitive to the natural environment.

Keywords: sustainable finance, climate change, green bonds, impact investing, corporate sustainability, environment

JEL Classification: G23, M14, D22, Q2, G14