Sustainability premium in energy bonds

Abstract

Abstract We investigate the extent to which belonging to a sustainable index leads to lower financing costs for companies in the energy industry. From an extensive sample that includes all energy bonds traded on the US corporate bond market between 2005 and 2014, we examine the differences between the yield spreads on bonds issued by green and non-green energy companies, based on the inclusion of issuers in the Dow Jones Sustainability Index. The yield spreads are computed from synthetic governmental bonds obtained discounting original cash flows from the zero-coupon yield curve. Controlling by bond fundamentals and market conditions, the sustainability premium averages 66 b.p. in yield spread terms. This premium depends on the credit quality of the issuer, ranging from 23 b.p. for investment grade bonds to 261 b.p. for junk bonds. This price premium that investors are willing to pay for the green energy company bonds entails a lower cost of debt for these companies.