The Green Bonding Hypothesis: How do Green Bonds Enhance the Credibility of Environmental Commitments?

Abstract

This paper proposes and provides evidence on a green bonding hypothesis, by which firms issue green bonds to commit to institutional oversight that holds them accountable for their environmental commitments. I find that firms with more environmental risks and opportunities, and from countries with weaker legal institutions, are more likely to issue green bonds. Furthermore, some green-bond issuers have poor environmental reputations and they are more likely to self-select stronger bonding mechanisms, including listing on exchanges with green-bond segments and getting external reviews. Consistent with green bonds attracting more environmental oversight, I find that both positive and negative media coverage of a firm's environmental activities increase after the issuance of green bonds. This heightened scrutiny potentially explains additional findings on the reduction in environmental controversies and higher emissions-target achievement for green-bond issuers.

Keywords: Green bonds, bonding hypothesis, climate change, sustainable finance, corporate social responsibility

JEL Classification: G12, M14, M41, Q56