Corporate green bonds from an issuer perspective

Abstract

As environmental considerations have become increasingly important in finance, new investment products have emerged. One of these new investment products is green bonds, debt securities whose proceeds are mandated to finance environmentally beneficial projects. Research has thus far concentrated on studying green bonds as a whole. However, given the growing role of companies in sustainable finance, especially corporate green bonds are an interesting subject to study.

This thesis studies corporate green bonds by looking at the motivations of issuers. The focus is especially on financial motivations and the green premium, which is the difference in returns between green and conventional bonds. The existence of a green premium would allow companies to acquire more affordable financing through green bonds. The thesis investigates the green premium at issuance, where companies directly benefit from the lower financing cost. Additionally, non-financial motivations for corporate green bond issuance are explored.

Results show that a small average green premium does exist for corporate green bonds. This premium is driven by increased demand from environmentally conscious investors. However, the existence of the green premium depends on many bond-, company- and country-specific factors. Certified green bonds from reputable companies in sustainability-minded countries exhibit the greatest green premiums. If the reverse is true, the green premium does not exist. This is because investors seek to invest in bonds that truly benefit the environment.

However, the thesis found that it is more expensive to issue green bonds than conventional ones. Green bonds have extensive reporting requirements, which incurs costs for the issuing company. However, these additional costs are smaller for companies with existing sustainability practices. Moreover, the costs were found to be relatively small and could be offset by the green premium.

The thesis also discovered non-financial benefits from green bond issuance. Green bonds are primarily used to improve the companies’ public image by signaling their commitment to environmental sustainability. This can have far reaching branding benefits among investors and the issuer customer chain. Green bond issuance was also found to affect company emissions and stock prices.