The Pricing of Green Bonds: Are Financial Institutions Special?

Abstract

The financial system plays a major role in the transition to a low-carbon economy. We investigate this issue analyzing the recent developments and challenges in the bond and debt markets. First, we study the pricing of green bonds at issuance. We find a premium when green bonds are issued by supranational institutions and corporates while there is no effect for financial institutions. We also document an effect for external review and repeated access to this market. Second, we investigate lending decisions by banks issuing green bonds. Our results show that these lenders reduce their funding towards more polluting segments of the economy but limited to the amount of loans they granted as lead bank in the deal. This mixed evidence about lending suggests that, at the time of issuance, investors may not identify a clear link between the greenbond issued by a financial institution and a green project, which would explain the absence of a green premium for financial issuers.

Keywords: Sustainable finance, climate change, green bonds, financial istitutions, bank loans

JEL Classification: G12, G20, Q52, Q53, Q54