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

52 Pages Posted: 9 Aug 2021 Last revised: 2 Mar 2023

See all articles by Shirley Lu

Shirley Lu

Harvard University - Business School (HBS)

Date Written: March 1, 2023

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

Suggested Citation

Lu, Shirley, The Green Bonding Hypothesis: How do Green Bonds Enhance the Credibility of Environmental Commitments? (March 1, 2023). Available at SSRN: https://ssrn.com/abstract=3898909 or http://dx.doi.org/10.2139/ssrn.3898909

Shirley Lu (Contact Author)

Harvard University - Business School (HBS) ( email )

Boston, MA 02163
United States

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