Rethinking the Value and Emission Implications of Green Bonds

Abstract

This paper (re)examines investors' green asset preferences and issuer's environmental performance. Using green bonds issued from 2013-2020, we find that shareholders' reactions to green bond issue announcements follow a skewed distribution and are mainly driven by large issuers. Unlike no yield differential in the primary market, green bonds in the secondary market have a lower yield of negative 32 basis points relative to a propensity score-matched sample. Somewhat contrary to the idea that investors are willing to take a lower yield to assist polluters to clean up, the secondary market “greenium” is however attributable to green bonds issued by the financial sector rather than those of polluting sectors. Surprisingly, issuers' emissions remain the same four years after the issuance of green bonds, suggesting they have modest to no environmental impact. Our work suggests investors might want to be cautious about green bonds' environmental impact and value implications.

Keywords: Sustainable Finance; Climate Change; Green Bonds; Corporate Sustainability; ESG

JEL Classification: G12, G14