Does it Pay to Be Green?

Abstract

In the recent years green bonds became a popular example of climate finance instruments. Although the volume of the green bond market has been increasing steadily in the last years, the actual impact of the “green label” on the market of bonds is still poorly understood. This article investigates the yield term structures of green and brown (standard) bonds from the same set of issuers in the US American municipal bonds market. We show that, although returns on brown bonds are on average higher than for green bonds, this spread can to a large extent be explained by properties of the respective issuing entity and the bond. The “green nature” of the bond rather seems to be penalized by the market, as green bonds are traded at lower prices/higher yield than would be expected by their credit profiles.