The Efficiency of Environmental Project Financing with Green Bonds in the Energy Sector: Evidence from EU Countries

Abstract

This paper investigates whether the issue of green bonds by energy companies allows lowering the cost of funding for their environmental projects. We use empirical data on green bond placement in the energy sector and comparable conventional bond yield curves to prove the existence of the green bond yield discount. The sample includes 37 plain vanilla green bond issues and comparable yield curves of EU energy companies for 2017–2020 with total volume EUR 25 bn. We demonstrate that green bonds have a 4.7 bps lower average yield compared to conventional bonds. This green bond discount is statistically significant at a 5% level and does not depend on issue size or debut status of the issue. We draw three main conclusions: (1) energy companies may lower cost of funding by issuing green bonds, making environmental projects more economically attractive, (2) the green bond discount is present for both inaugural and subsequent green bond issues, which makes it reasonable to finance all environmental projects with green bonds, (3) the green bond discount does not depend on the issue size, which makes green bonds an appropriate choice for financing capital-intensive projects.