Green Labeling

Abstract

We use a natural experiment in the U.S. municipal bond markets to study the causal effects of green bond labeling and socially responsible capital on financial and environmental outcomes. Comparing bonds financing similar projects, we find that labeled bonds attract significantly more capital from ESG-focused mutual funds. Despite the strong demand effect, evidence of the green label affecting bond yields is limited, suggesting high price elasticity. Aligned with political incentives, labeled governments are more inclined to make subsequent sustainability pledges, and issuers in Democratic states are more likely to adopt the green label. While labeled issuers improve their environmental performance after the issuance, there is no differential improvement compared to unlabeled issuers. Our findings suggest that at least historically, financing green projects through green bonds has had no incremental environmental impact compared to what would have been achieved through regular capital markets.

Keywords: Impact investing, Green bonds, ESG, Public finance

JEL Classification: G12, Q53