Whether corporate green bonds act as armour during crises? Evidence from a natural experiment

Abstract

PurposeThe present study examines the rationale behind the increased global presence of corporate green bonds as a green financing tool to facilitate sustainable practices and eco-friendly investing. The authors investigate the intriguing question of whether the companies that issue green bonds are valued more by investors or not, and further extend our analysis by exploring whether the green image of companies helps to minimize the value erosion during a crisis and enhance the resilience of the stocks?Design/methodology/approachTo examine the association between environmental commitments and firm value, the authors use the COVID-19 crisis as an exogenous shock and create a perfect natural setting to eliminate the endogeneity bias from our estimations. Moreover, the authors use propensity score matching to choose a one-to-one match of green bond firms with a larger pool of brown bond firms and eliminate the “size effect” arising out of the disproportionate sample size of green and brown bond firms.FindingsThe results of the study indicate that green bond firms are valued more by investors compared to brown bonds firms. Hence, green bond issuance acts as a strong signal of a firm's environmental commitment and it is well recognized by the investors. One of the possible reasons for a higher value of green bond firms may be due to their ability to arrest value erosion during environmental shocks. The authors could not find any difference in the resilience of green and brown bond firms.Originality/valueThe study contributes to the growing literature in the area of impact investing, specifically on exponentially growing innovative instrument green bond. Our study integrates two areas of research, i.e. corporate finance and impact investing by examining the impact of green bond issuance on firm value and stock market returns. The results would help environmentally sensitive investors to devise their investment portfolios more efficiently.

Impacts of climate pact on global oil and gas sector stocks

“…Al Mamun et al (2022) demonstrate the positive effect of green finance on decarbonization, while Boubaker et al (2022b) highlight the resilience-enhancing role of corporate social responsibility practices during the COVID-19 pandemic. Finally, Sisodia et al (2022) find that green bond firms are valued higher by investors compared to brown bond firms, signaling their environmental commitment. Similarly, Alharbi et al (2023) underscore the significance of green finance, particularly green bonds, in fostering renewable energy production, and emphasize the importance of technological capacity and policy commitments in driving this impact.…”

Green finance: Evidence from large portfolios and networks during financial crises and recessions

“…Such findings, however, are not yet conclusive. Indeed, other studies did not find higher levels of resilience in companies that issue green bonds, compared to the brown ones, during the COVID‐19 crisis, despite reporting a lower value erosion (Sisodia et al, 2022). Bax et al (2023) showed that, during the COVID‐19 outbreak, the systemic risk reacted more readily to the idiosyncratic shocks of those companies having a greater rating in terms of environmental sustainability.…”

Green Bonds as a Tool of Green Financing

“…In line with the above arguments, several papers argue that by issuing green bonds companies can signal their commitment to climate-friendly policies, making them attractive for investors who aim at contributing to reducing climate change risks (Kuchin et al, 2019;Daubanes et al, 2021;Flammer, 2021;Sisodia et al, 2022). These papers analyze the signaling effect by looking at how the stock market responds to the issuance of green bonds.…”