Practical Vitality of Green Bonds and Economic Benefits

A Kant

doi:10.26794/2308-944x-2021-9-1-62-83

Abstract

Climate change is an overarching challenge for achieving sustainable development. “Green” or “Climate” Bonds are often seen as a financial instrument that may help overcome low-carbon investment defiance. This paper explores green bonds’ potential contribution to low-carbon transition and the corporate sector’s benefit following the stock market reaction. This paper focuses on a new and fascinating subject because the green bonds market is under constant scrutiny since the emergence of the first green bond in 2007. Anticipating the significance of action towards climate change is continuously increasing over time. This project can be seen as a supporting argument for investing in green bonds and fighting against climate change. This study investigates the recent developments and challenges in the green bond market. I used matching criteria and performed multivariate OLS regression to test whether the green bond is priced differently than conventional ones. The result finds that green bonds are cheaper than conventional bonds with a 1.93–2.24 per cent premium, consistent with prior studies in this topic. I used a sample of 200 corporate green bonds issued after the Paris Agreement, i. e., from December 2015 to December 2019. I further document that the stock market reacts positively to green bonds’ announcements. For this, I performed the CAR test on a company’s stock price, which gives a statistically significant abnormal return of 0.23 per cent and 1.14 per cent over time windows 10 and 20 days, respectively. Moreover, green bonds’ environmental performance on carbon emission reduction proved to be an insignificant player. For this, I tested a relationship between green bond labels and the firms’ carbon emission. The mixed results suggest that maybe green bonds are performing well economically, but it is still far from achieving its practical goal.

Highlights

The concern over the acceleration of climate change is real
There are significant measures taken after that period and investigates whether the green bonds are priced lower than conventional bonds
Taking four years of data from 2015 to 2019 of corporate green bonds, especially issued by non-financial companies, the main results are observed after regression testing and with some robustness check by adding more controlled variables

Summary

Introduction

The concern over the acceleration of climate change is real. Ever since the tracking of climate change began in 1880, the six warmest years on record for the planet have all occurred since 2010 (National Oceanic and Atmospheric Administration NOAA, 2018). One common explanation for this yield difference is the high demand and limited supply of green bonds These previous findings show that even after all the surplus costs associated with Green Bonds issuance, these debt instruments are still a relatively cheaper and efficient form of financing for the issuers. There are two major econometric methods used in the process to study, namely, a simple multi-factor OLS regression analysis to test whether the Green Bonds are priced differently than Ordinary Bonds, and an event-study that examines the reaction on the company’s stock price on the issuance of Green Bonds since it is important to know whether the issuers benefitted with the new instruments. Contrary to these findings, Lebelle et al (2020) found market reacts negatively to green bonds’ issuance This hypothesis tests if green bonds are cheaper than ordinary ones, it should positively impact the company’s stock price.

Econometric Methodology

Findings

Conclusions