Abstract
We investigate the asset pricing implications of the greenness of bonds. To estimate a green-pricing effect, we determine the `green bond premium' as the difference between the yields of matched conventional and green-labeled bonds. On a cross-sectional average, green bonds experience no yield premium. However, investors trade green bonds with external greenness evaluations at positive premiums, i.e., investors accept premiums of 3-8 basis points for bonds with a substantial environmental agenda. This external validation effect, which is strongest for bonds that are rated dark-green, may offset not incurring information costs, as this effect decreases with increasing age of bonds.
Highlights
In recent finance literature, there has been a lively debate on the asset pricing implications of sustainable and green investment opportunities (Bolton and Kacperczyk 2021; Cheema-Fox et al 2019)
To illustrate the time-variant green bond premium, we calculate the cross-sectional average of pit on a daily basis to show the general development of the estimated green bond premium over time
The green bond premium was rather volatile in earlier years and became stable in recent years
Summary
There has been a lively debate on the asset pricing implications of sustainable and green investment opportunities (Bolton and Kacperczyk 2021; Cheema-Fox et al 2019). While existing studies focus mainly on equity, green bonds are an important innovative financing tool for addressing environmental and climate challenges (Ehlers and Packer 2017). Since the European Investment Bank issued the first green bond in 2007, the. According to the Climate Bond Initiative (2020), the worldwide annual issue volume has grown from less than 40 billion USD in 2014 to over 160 billion USD in 2018 and 257.7 billion USD in 2019 worldwide. This rapid growth which indicates an increasing amount of funds to finance climate change adaptation and mitigation, has attracted the attention of academics. Existing studies explore whether issuers of such green securities enjoy lower costs of financing, and at the same time, whether investors request lower returns
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