The Green Corporate Bond Issuance Premium

Abstract

We study a global panel of green and conventional corporate bonds to assess the borrowing cost advantage at issuance for green bond issuers. We find that, on average, green corporate bonds have a yield spread that is between 3 and 8 basis points lower relative to conventional bonds, depending on the regression specification. We link this borrowing cost advantage, or "greenium," to demand pressure at issuance, highlighting a key mechanism through which the greenium is allocated. We find that a significant greenium emerges only as of 2019, coinciding with the growth of the sustainable asset management industry following EU regulation. While green bond governance and external review appear to matter for the greenium, the credibility of the underlying projects has little impact. Instead, the greenium is unevenly distributed to large, investment-grade issuers, primarily within the banking sector and developed economies. These findings have implications for the role of green bonds in incentivizing meaningful green investments throughout the global economy.

Keywords: Green bonds, corporate bonds, bond issuance, green bond premium, green finance, sustainable finance, climate finance

JEL Classification: C33, G15, G18, G23, G28, Q54, Q56