Abstract
The financial system plays a major role in the transition to a low-carbon economy. We shed light on this analyzing recent developments in the bond and debt markets. First, we study the pricing of green bonds at issuance. We find a premium for green bonds issued by supranational institutions and corporates but no yield differences in case of issuances by financial institutions. We also document an effect for external review and repeated access to the green bond market. Second, we show that banks that issue green bonds reduce lending towards carbon-intensive sectors, but limited to the loan amounts granted in the role of lead bank in the deal. This mixed evidence about lending suggests that, at the time of issuance, investors may not be able to identify a clear link between the green bond issued by a financial institution and a specific green investment project, which would explain the absence of a green premium for financial issuers.
Highlights
The traditional public intervention to correct externalities, notably, in the form of taxes, subsidies and regulation, seems largely insufficient to address the current environmental and climate-related challenges
We find a premium for green bonds issued by supranational institutions and corporates, while there is no effect for financial issuers
We find that only green bonds issued by supranational institutions (column (2) of Table 3) and non-financial corporations (column (4)) sell for a premium compared to ordinary bonds
Summary
We find a premium for green bonds issued by supranational institutions and corporates, while there is no effect for financial issuers This evidence is confirmed by the findings in the battery of tests that we run to gain further insights regarding the main determinants of bond yields in the green market. Our results suggest that the green bond label per se is not enough to raise funding at a lower cost This is most likely due to the difficulties for the investors to disentangle issuers with a genuine commitment to environmentally friendly projects from those engaging in mere ‘greenwashing’. The analysis in the second part of the paper suggests that activity on the green debt market is part of a broader environmental strategy whereby banks reduce lending to more polluting sectors Both sides of banks’ balance sheets, to certain extent, are becoming greener.
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