External reviews and green bond credibility

Abstract

In an effort to alleviate greenwashing concerns, firms are increasingly commissioning voluntary external reviews of their green bond issues. This paper examines the certification role of external parties in the corporate green bond market and the effects on green bond pricing at issuance. Using a comprehensive sample of 1242 corporate green bonds issued between 2013 and 2020, we initially find that external reviews have no significant on average effect on the green bond premium (i.e., the difference in yield between a green bond and a similar conventional bond). However, we predict and find that external reviews have a larger impact on the green bond premium (i.e., a 50 basis point premium) for issuers domiciled in common law countries. Funding costs are also lower when issuers obtain external reviews from more reputable reviewers. Overall, our results suggest that the pricing implications of green bond external reviews depend crucially on both the location of the issuer and the reputation of the external reviewer.