Environmental score and bond pricing: It better be good, it better be green

Abstract

We provide empirical evidence that the pricing of green bonds tends to be highly sophisticated and is based on a two-tiered approach. When buying a green bond, investors do not look only at the presence of a green label, but also consider additional characteristics of the bond that involve the environmental score of the issuer and the soundness of the underlying project. By comparing the yields at issuance of green bonds to those of a matched control sample of conventional bonds, our baseline specification identifies a premium of 16 basis points for the green label alone. Furthermore, when the environmental score of the issuer is in the top tercile of the cross-sectional distribution, the greenium increases potentially doubling. Green certification and periods of heightened climate uncertainty also significantly affect the size of the greenium.