The green premium puzzle: Are investors willing to sacrifice returns for environmental impact? Evidence from the corporate green bond market
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School of Business |
Master's thesis
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Date
2020
Department
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Mcode
Degree programme
Finance
Language
en
Pages
69
Series
Abstract
This thesis studies investors’ willingness to sacrifice returns for environmental impact in the fixed income market. In recent years, green bonds have become increasingly popular way for firms to raise financing for environmentally sustainable projects. This has raised the question whether green bonds are priced at a premium to conventional bonds. A handful of studies have investigated this so-called green premium, but the findings remain largely inconclusive. The objective of this thesis is to investigate the existence of the green premium in the corporate bond market. My sample consists of 248 green bonds issued by US and European companies between 2013 and 2019. I construct two matched samples by matching each green bond with the closest comparable conventional bond from the same issuer based on a set of matching criteria. I employ a set of non- parametric tests and OLS regressions to estimate the green premium. My results show that investors pay a moderate premium of 4 basis points for green bonds in the primary market. I find that investors pay a slightly smaller premium of 2 basis points for green bonds in the secondary market. Furthermore, I find that it can take up to 12 months for the premium to appear in the secondary market after the issuance. In addition, I show that the premium cannot be explained by differences in bond volatility between green and conventional bonds. Moreover, I find significant differences in the premium between currencies and industries in the secondary market. The premium is more pronounced for USD-denominated green bonds and green bonds issued by non-financial non-utilities. I do not find any significant differences in the premium between first-time or repeat issuers or between externally reviewed and other green bonds. Also, my results show that investors are unwilling to pay a premium for green bonds issued by companies with poor ESG performance. However, investors do not seem to be concerned about the issuer’s poor environmental performance. This thesis contributes to the growing green bond literature by providing new evidence on the pricing of corporate green bonds. These findings have practical implications for issuers, investors and policymakers by providing knowledge, e.g., on the pricing benefits to the issuers and on the cost of investing in green bonds. Future research could study the performance of green bonds during a market downturn or the long-term benefits of issuing green bond, such as the impact of green bond issuance on the issuer’s long-term cost of debt. Finally, it would be interesting to extend the pricing analysis to other sustainability- or ESG-linked debt securities.Description
Thesis advisor
Kaustia, MarkkuKeywords
green bonds, corporate bond market, socially responsible investing, asset pricing