This post is the latest in our special issue: “Climate Change and Financial Markets – Risk, Regulation, and Innovation.” To learn more about the special issue and the work of the Global Financial Markets Center around climate change and financial markets, please read the special issue’s introduction here. And to review all The FinReg Blog posts that touch on climate change, go here.
Corporate green bonds—that is, corporate bonds whose proceeds are committed to finance climate-friendly projects—are becoming increasingly popular. Since the early days of this market in 2013, the issuance of corporate green bonds has skyrocketed. In 2018 alone, the corporate sector issued green bonds worth $95.7B. Many high-profile companies, such as Apple, Toyota, and Unilever, have issued green bonds. For example, in November 2019, Apple issued a $2.2B green bond to support Apple’s efforts to “reduce its carbon footprint, use greener materials in its products and conserve resources.” In February 2020, Toyota issued a $750M green bond to help fund “vehicles that meet specific clean air criteria, including powertrain, fuel efficiency and emissions.”
Despite the rapid growth of the green bond market, little is known about this financial innovation. In particular, do green bonds yield improvements in companies’ environmental footprint, or are they merely a “greenwashing” tool (that is, the practice of making unsubstantiated or misleading claims about the company’s environmental commitment)? And what are the implications for shareholders’ wealth? In a recent article, forthcoming in the Journal of Financial Economics, I examine these questions.
I start by documenting several facts pertaining to the issuance of corporate green bonds. First, I confirm the rapid growth of this market. While worldwide issuance of corporate green bonds was merely $5B in 2013, it soared to $95.7B by 2018. Second, corporate green bonds are more prevalent in industry sectors in which the natural environment is financially material to the firms’ operations (e.g., utilities, energy, and transportation). Third, corporate green bonds are especially prevalent in China, the U.S., and Europe (the Netherlands, France, and Germany being the larger issuers in dollar terms).
I then examine how the stock market responds to the issuance of corporate green bonds, as well as the implications for firm-level outcomes.
First, I find that stock prices respond positively to the issuance of green bonds. The response is especially pronounced for green bonds that are certified by independent third parties. This suggests that shareholders perceive green bonds—especially those that convey a credible signal of the firm’s commitment to the environment—to be beneficial for the issuing company.
This finding highlights the importance of certification in the green bond market. Since the green bond market lacks public governance, concerns have been raised that companies may engage in greenwashing, investing the green bond proceeds into non-green projects. To mitigate these concerns, the green bond market relies on private governance regimes in the form of voluntary certification standards (such as the Climate Bond Standards).
Second, I find that companies improve their environmental footprint following the issuance of green bonds. Specifically, companies significantly reduce their volume of CO2 emissions post-issuance. Importantly, this finding is inconsistent with the greenwashing motive—if companies were to issue green bonds to portray themselves as environmentally responsible, but with no intention to deliver, one would not observe tangible improvements in environmental performance following the green bond issue.
Third, I find that green bond issuers experience an increase in ownership by long-term and green investors. This indicates that green bonds help attract an investor clientele that values the long-term and is mindful of the natural environment.
Finally, I examine whether green bonds provide a cheaper source of financing to companies. This could be the case if green bond investors are willing to forgo financial returns for the sake of the environment. Nevertheless, I find no difference between the returns of green and non-green (that is, conventional) bonds of the same issuer. This is consistent with a recent article by Larker and Watts in the Journal of Accounting and Economics, who find no pricing difference between green and brown bonds in the market for U.S. municipality bonds. This suggests that green projects offer competitive returns, and hence need not command a lower return. This finding echoes well with the growing literature in ESG showing that ESG positively contributes to financial performance. (For example, see my previous work in Management Science that shows evidence of a causal link between companies’ ESG engagement and financial performance).
In sum, the evidence suggests that corporate green bonds are a win-win: they benefit both companies and the environment. While the evidence is encouraging, a word of caution is in order. The green bond market is still in the early stage, and it remains to be shown whether those benefits will still prevail once the market achieves a much bigger scale. Nevertheless, the evidence to date does suggest that green bonds have the potential to become a powerful tool in climate finance to fight climate change—a tool that can be used by the private sector regardless of (the lack of) government actions.
Caroline Flammer is an Associate Professor and Dean’s Research Scholar at Boston University’s Questrom School of Business.
This post is adapted from her paper, “Corporate Green Bonds,” forthcoming in the Journal of Financial Economics and available here.