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Achieving global climate objectives necessitates substantial financial commitments, with estimates suggesting a monumental investment exceeding $270 trillion is required for decarbonization efforts to realize net-zero ambitions by 2050. This translates to an annual investment of around $9.4 trillion. Within this context, sustainable debt, including green bonds, has experienced significant growth, reaching $3.7 trillion USD. Corporate sustainable debt notably constitutes approximately half of this amount, around $1.7 trillion USD.[1] In this paper, we revisit prior predictions regarding the pricing of green securities and their environmental implications using green bond data. We propose a relatively novel hypothesis termed the 'sustainability gatekeeper.' 

The 'sustainability gatekeeper' hypothesis suggests that the bond market trusts the financial sector to screen out "brown" issuers while deploying funds raised via green bonds as green loans.[2] Financial firms, while not direct emitters, play a crucial role in channeling capital towards sustainable projects. They are responsible for about 50% of green bond issuance. In contrast, industries known for their pollution, such as the industrial, material, utility, and energy sectors, account for around 40% of the green bond market. However, their immediate environmental impact may not be evident, as they require substantial time and investment in long-term projects to significantly reduce their negative environmental footprint.

Analyzing the market reaction to green bond announcements reveals intriguing trends. We found that the market reaction (measured as cumulative abnormal returns (CARs)) for the announcement of green bond issues from 2013-2022 is 0.274%.[3] However, this result is primarily attributable to financial sector firms. The 16-day market reaction for financial sector green bonds is 0.330%. See Figure 1 for details. Surprisingly, the analogous stock price reaction for green bonds issued by sectors known to pollute the environment is statistically insignificant. These findings are consistent with the role of financial firms as 'sustainability gatekeepers' channeling capital to sustainable projects.

Previous research has focused on the primary market of green bond issuance and found no apparent premium when compared with conventional bonds. However, analyzing the secondary debt market is critical. Post-issuance reports, such as impact reports, second opinion reports, capital allocation reports, and use of proceeds reports, influence pricing dynamics over time.[4] Comparing conventional bonds, we find a ‘greenium’ of 5.7 basis points accumulated over one month.[5] The average greenium is mostly explained by the 8.2 bps greenium for green bonds issued by the financial sector. This pattern aligns with the sustainability gatekeeper hypothesis. We also find higher yields for green bonds issued by polluting sectors of the economy, suggesting perceived higher risk by investors.

Moreover, the difference in illiquidity between green bonds and conventional bonds explains the differences in greenium across these two sets of bonds. The greenium has reduced with time in both stock market as well as in debt market. (See Figure 2)

In our additional analysis, we investigate the effect of issuer-level concentration in the green bonds market on cumulative abnormal stock returns (CARs). This concentration emerges because only certain firms that can restrict their use of proceeds are active in the market, leading to issuer-level concentration and frequent issuances by these firms. This trend of issuer-level clustering is seen worldwide, with companies such as Solar City (Tesla), Vasakronan AB, Credit Agricole Corporate & Investment, and Deutsche Bank AG leading green bond issuances in their respective countries. Our findings indicate higher CARs for these issuers, particularly among financial firms.

Next, we evaluate who issues green bonds and whether such bonds are associated with intended positive social and environmental outcomes. Firms with higher environmental risks, as indicated by various metrics, are more inclined to issue green bonds, potentially signaling intentions to mitigate their environmental impact. However, despite this initial intent, these environmental risks do not decrease even after three years, a trend observed even when analyzing voluntarily disclosed emissions data. Consequently, robust evidence for the signaling hypothesis, suggesting green bond issuers commit to reducing future emissions, is lacking.

In conclusion, our work adds to extant knowledge on the pricing of sustainable debt and the environmental implications of this asset class. We find support for the socially conscious investor hypothesis in that the greenium for the average sample is 5.7 basis points.  However, consistent with the sustainability gatekeeper hypothesis, this lower yield is concentrated in green bonds issued by financial firms. Finally, the signaling hypothesis, related to firms issuing green bonds to indicate their commitment to cutting environmental exposure, is not borne out by our data. 

By Jitendra Aswani, Post-Doctoral Associate, MIT Sloan, and Shiva Rajgopal, Columbia Business School.



[2] Issuers labeled as "Brown" are typically associated with pollution-intensive sectors such as industrials, materials, energy, and utilities. Within the finance sector, approximately half are banks, followed by real estate finance firms and other financial entities.

[3]To calculate cumulative abnormal returns (CARs) surrounding the announcement of green bonds, we employ the standard market-adjusted return model. CARs represent the total abnormal returns (ARs) spanning from t days before to  t days after the announcement. For increased robustness, CARs are calculated across various event windows, including 16 days (-5,10), 11 days (-5,5), 9 days (-4,4), 7 days (-3,3), 5 days (-2,2), and 3 days (-1,1). Abnormal Return (AR) is calculated as the difference between the stock's return on a specific day and the market return on that same day. In line with Flammer (2021), we use the Morgan Stanley Capital International’s (MSCI) All Country World Index (ACWI) as the market benchmark.


[5] Greenium refers to the yield or return differential between a green security and its conventional counterpart. For example, in the bond market, if green bonds yield 5.7 basis points less than conventional bonds, it indicates a greenium of 5.7 basis points for the green bond market. Similarly, in the stock market, if green stocks (from non-polluting sectors) outperform brown stocks by 5.7%, then these green stocks exhibit a greenium of 5.7%.

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This article features in the ECGI blog collection Governance and Climate Change

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