For the Love of the Environment: An Analysis of Green versus Brown Bonds During the COVID-19 Pandemic

Abstract

Increased awareness among investors about environmental and social issues made green bonds a popular investment alternative over the last decade. This study analyzes whether the primary and secondary market return performance of green bonds is affected from the market conditions induced by the pandemic. Results presented in this study show that while both green and comparable conventional (brown) bonds experienced a decline in their primary market yields following the start of the pandemic, the decline for the green bonds was somewhat larger, resulting in an even larger ‘greenium’ during the pandemic (32 basis points for corporate and agency issuers). Secondary market results of the study confirm the strong demand for green bonds in this market as well and show that while both green and brown bonds experience a decline in their secondary market returns during the pandemic, the decrease in brown bond returns is 45 basis points larger compared to green bonds. Findings also suggest that failure to take into account issuer characteristics may lead to biased results when green bonds are compared against their conventional alternatives.

Keywords: green bonds, greenium, COVID-19 pandemic, diff-in-diff

JEL Classification: G10, G11