The Pricing of Green Bonds: External Reviews and the Shades of Green

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 crosssectional average, green bonds experience a statistically significant positive premium. This premium increases with external greenness evaluations, i.e., investors accept premiums of up to 5 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.

Between impact and returns: Private investors and the sustainable development goals

“…Research on green bonds, for example, finds that at issue yields of green bonds are on average 0.06% below the yields of comparable non‐green bonds, meaning investors pay a premium for their green investments (Baker et al, 2018). This green bond premium increases with the existence of what Dorfleitner et al (2021) refer to as external greenness validations of green bonds, and with how high that externally validated greenness indicator is. At the same time, other research on investor preferences indicates that investors' willingness to pay more for investments with higher impact is mixed (Barber et al, 2021; Heeb et al, 2022).…”

ESG-Valued Portfolio Optimization and Dynamic Asset Pricing

“…The first is to issue products specifically designed to fund projects having positive environmental or social impact. Examples of securities issued with the specific purpose of financing projects related to environmental and climate change objectives are green and blue bonds 1 [29,31]. Ehlers et al [31] have documented lower credit spreads 2 on borrowing 1 The first green bond was issued by the European Investment Bank in 2007. https://www.eib.org/en/investor-relations/cab/index.htm 2 The spread of yield at issuance over the yield curve of an appropriate treasury security green bonds compared to that of a traditional counterpart issued by the same institutions.…”