Abstract
Global shifts in perspectives on environmental concerns and the growing significance of large-scale sustainabilityprograms have brought the issue of green financing to the fore of financial research. In terms of volume, this area hasdemonstrated high growth rates in various types of capital markets.Unfortunately, few studies exist which explore the yields on green bonds in emerging markets in comparison todeveloped ones. As such, in this paper, we contribute new evidence to the field of green financing and outline severalmajor differences between green issues in these types of capital markets.We study yield premiums of green bonds on a sample of 2,450 green issues and comparable traditional bonds over theperiod from 2008 to March 2020. We contribute to the literature by new empirical evidence on green financing.Our results provide evidence of small but statistically significant negative premiums on green bonds of 23,4%1 comparedto the expected yields for standard issues. We also show that the negative premium on green bonds is more pronouncedin developed markets (- 27%2) than in emerging ones (18%3). Moreover, we provide new evidence on the negativepremium-liquidity relationship. Our research concludes that negative premiums are related to a higher level of liquidity:green bonds have lower bid-ask spreads and a higher level of liquidity than traditional ones.These conclusions can assist investors, potential issuing companies, and public authorities in achieving a betterunderstanding of the current situation of the green bond market in global terms.
Highlights
Due to the acute contemporary significance of environmental issues, investments in projects which mitigate environmental risks have grown increasingly relevant
A decrease of the rate of growth of the green bond market may be related to both a transition of the market into the maturity stage and a ‘cannibalism’ process, accounting for the growing segment of social bonds and bonds aimed at funding sustainable development projects – i.e. sustainability bonds
The analysis shows that yield discounts and a higher marketability are characteristic of green bonds from institutional issuers, in comparison to commensurable issues of traditional bonds
Summary
Due to the acute contemporary significance of environmental issues, investments in projects which mitigate environmental risks have grown increasingly relevant. Out of the possible reasons for the rapid development of green bonds, we can distinguish a better understanding of the relation between the climate change and its potential influence on the financial system This may be seen to be characterised in terms of investor support (as well as political support) in relation to the signing of the Paris Climate Agreement by approximately 200 countries in 2015. A decrease of the rate of growth of the green bond market may be related to both a transition of the market into the maturity stage and a ‘cannibalism’ process, accounting for the growing segment of social bonds and bonds aimed at funding sustainable development projects – i.e. sustainability bonds 11 S&P (2019) Green Finance: Modest 2018 Growth Masks Strong Fundamentals for 2019
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