Although green bonds are becoming increasingly popular in the corporate finance practice, little is known about their implications and effectiveness in terms of issuers' environmental engagement. With the use of matched bond-issuer data, we test whether green bond issues are associated to a reduction in total and direct (Scope 1) emissions of nonfinancial companies. We find that, compared with conventional bond issuers with similar financial characteristics and environmental ratings, green issuers display a decrease in the carbon intensity of their assets after borrowing on the green segment. The decrease in emissions is more pronounced, significant and long-lasting when we exclude green bonds with refinancing purposes, which is consistent with an increase in the volume of climate-friendly activities due to new projects. We also find a larger reduction in emissions in case of green bonds that have external review, as well as those issued after the Paris Agreement. K E Y W O R D S climate change, corporate sustainability, environment, green bonds, impact investing 1 | INTRODUCTION Green bonds are debt instruments that differ from conventional fixed income securities only in that the issuer pledges to use the proceeds to finance projects that are meant to have positive environmental or climate effects. Since its debut in 2007, the green bond market has been growing steadfastly. According to the Climate Bond Initiative (2020), new issues have reached 230 billion euros (257 billion USD) globally in 2019, up from 142 billion in 2018 and 28 billion euros in 2014.Although the overall size of the green segment is still tiny in comparison with the funds raised with conventional bonds, there is massive potential for further market growth as environmental issues are raising high on the policy agenda. For instance, Europe alone is estimated to need about 180 billion euros of additional investment a year to achieve the targets set for 2030 in the context of the 2015 Paris Agreement on climate change, including a 40% cut in greenhouse gas (GHG) emissions.The growing interest of public policy towards green bonds has indeed already materialized into a number of initiatives to encourage market participants, on both the demand and the supply side. For instance, direct subsidies or grant schemes, such as the Sustainable Bond Grant in Singapore, are in place to support eligible issuers in covering the additional costs associated with external review for the green securities.Likewise, several jurisdictions worldwide, including China and Honk Kong, have issued regulations in order to enhance transparency and disclosure on the green bond market, which is instrumental in aligning investors' incentives. A major development at the international level is the design of uniform green bond standards by the European Commission, in the context of a broader initiative to promote sustainable finance. Like for existing market-based voluntary standards, the proposed European Union (EU) standards adopt a project-based approach grounded on the bond p...

The financial system plays a major role in the transition to a low-carbon economy. We investigate this issue analyzing the recent developments and challenges in the bond and debt markets. First, we study the pricing of green bonds at issuance. We find a premium when green bonds are issued by supranational institutions and corporates while there is no effect for financial institutions. We also document an effect for external review and repeated access to this market. Second, we investigate lending decisions by banks issuing green bonds. Our results show that these lenders reduce their funding towards more polluting segments of the economy but limited to the amount of loans they granted as lead bank in the deal. This evidence may explain why we do not find a green premium for financial issuers. Yet it also suggests that the banking system may play a much larger role in channelling funds towards low-carbon activities, and thus reducing the environmental risks also for the financial system.

The financial system plays a major role in the transition to a low-carbon economy. We investigate this issue analyzing the recent developments and challenges in the bond and debt markets. First, we study the pricing of green bonds at issuance. We find a premium when green bonds are issued by supranational institutions and corporates while there is no effect for financial institutions. We also document an effect for external review and repeated access to this market. Second, we investigate lending decisions by banks issuing green bonds. Our results show that these lenders reduce their funding towards more polluting segments of the economy but limited to the amount of loans they granted as lead bank in the deal. This evidence may explain why we do not find a green premium for financial issuers. Yet it also suggests that the banking system may play a much larger role in channelling funds towards low-carbon activities, and thus reducing the environmental risks also for the financial system.

The tax deductibility of interest payments in most corporate income tax systems coupled with no such measure for equity financing creates economic distortions and exacerbates leverage. This paper discusses the consequences of this debt bias and the possible remedies.JEL classification: H25, H32, G21, G32