Green Labeling

Abstract

We use a natural experiment in U.S. municipal bond markets to study why issuers choose green-labeled bonds and whether the label adds value beyond regular capital markets. Labels attract more (fewer) ESG (non-ESG) funds but have limited effects on yields and issuance sizes. Labeled governments are more inclined to make subsequent sustainability pledges, indicating social signaling rather than financial benefits as primary motivation. While labeled issuers improve environmental performance after issuance, there is no differential improvement compared to unlabeled issuers. Our findings suggest that, historically, financing green projects through green bonds has had no incremental environmental impact beyond regular markets. 

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

JEL Classification: G12, Q53