Is 'Greenness' Priced in the Market? Evidence from Green Bond Issuance in China

The Journal of Alternative Investments, Summer 2020; DOI: https://doi.org/10.3905/jai.2020.1.097

Posted: 2 Oct 2019

See all articles by Zhiyao Deng

Zhiyao Deng

LSE

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Yupu Zhang

The University of Hong Kong - Faculty of Business and Economics

Date Written: September 24, 2019

Abstract

Green bonds are bonds with a defined use of proceeds towards mitigating and adapting to climate change and solving environmental problems. While its market has expanded rapidly in recent years and attracted great investment attention, whether investors can identify greenwashing behaviors remains a primary concern. This paper takes advantage of the unique feature of the Chinese green bond market that allows a proportion of the proceeds to be used for non-green purposes. We find that greener bonds (more proceeds are used for green projects) are sold at a premium. This pricing differential is primarily driven by bonds whose proceeds are 100% used for green projects. Our results also show that green bonds verified by a third-party have lower yield spreads, and the effect is stronger for more reputable third-parties. Overall, our results suggest that investors only reward fully green bonds, and they can differentiate greenwashing.

Keywords: Climate change, Green finance, Green bonds, Asset pricing

JEL Classification: G11, G12, Q50

Suggested Citation

Deng, Zhiyao and Tang, Dragon Yongjun and Zhang, Yupu, Is 'Greenness' Priced in the Market? Evidence from Green Bond Issuance in China (September 24, 2019). The Journal of Alternative Investments, Summer 2020; DOI: https://doi.org/10.3905/jai.2020.1.097, Available at SSRN: https://ssrn.com/abstract=3458838 or http://dx.doi.org/10.2139/ssrn.3458838

Zhiyao Deng

LSE ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

Yupu Zhang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong

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