ArticlePublisher preview available

Are green bonds priced differently from conventional bonds?

DOI:10.1057/s41260-018-0088-5
Authors:
Britta Hachenberg at Technische Hochschule Köln
Britta Hachenberg
Dirk Schiereck at Technische Universität Darmstadt
Dirk Schiereck
Read publisher preview
Download citation
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

The young growing market for green bonds offers investors the opportunity to take an explicit focus on climate protecting investment projects. However, it is an open question whether this new asset class is also offering attractive risk–return profiles compared to conventional (non-green) bonds. To address this question, we match daily i-spreads of green-labeled and similar non-green-labeled bonds and look at their pricing differentials. We find that rating classes AA–BBB of green bonds as well as the full sample trade marginally tighter for the respective period compared to non-green bonds of the same issuers. Furthermore, financial and corporate green bonds trade tighter than their comparable non-green bonds, and government-related bonds on the other hand trade marginally wider. Issue size, maturity and currency do not have a significant influence on differences in pricing but industry and ESG rating.
  • A preview of this full-text is provided by Springer Nature.
  • Learn more
Preview content only
Content available from Journal of Asset Management
This content is subject to copyright. Terms and conditions apply.
ORIGINAL ARTICLE
Are green bonds priced differently from conventional bonds?
Britta Hachenberg
1
•Dirk Schiereck
1
Revised: 27 June 2018 / Published online: 6 August 2018
Springer Nature Limited 2018
Abstract The young growing market for green bonds
offers investors the opportunity to take an explicit focus on
climate protecting investment projects. However, it is an
open question whether this new asset class is also offering
attractive risk–return profiles compared to conventional
(non-green) bonds. To address this question, we match
daily i-spreads of green-labeled and similar non-green-la-
beled bonds and look at their pricing differentials. We find
that rating classes AA–BBB of green bonds as well as the
full sample trade marginally tighter for the respective
period compared to non-green bonds of the same issuers.
Furthermore, financial and corporate green bonds trade
tighter than their comparable non-green bonds, and gov-
ernment-related bonds on the other hand trade marginally
wider. Issue size, maturity and currency do not have a
significant influence on differences in pricing but industry
and ESG rating.
Keywords Green bond ESG criteria Corporate financial
performance Credit rating
Introduction
Sustainable and responsible investments (SRI) are esti-
mated to have reached 22.89 trillion U.S. dollars globally
in 2016 (Global Sustainable Investment Alliance 2017). In
Canada and Europe,
1
which represent two of the three
largest markets, bonds account for 64.4% of SRI. Further
indicators show that this large market will grow on an
accelerating pace within the next years. A total of 409
investors representing more than 24 trillion U.S. dollars in
assets signed a statement that emphasizes the need for
climate resilient investments.
2
Likewise, more than 1,500
investors representing around 60 trillion U.S. dollars in
assets under management have signed the principles for
responsible investment (Principles for Responsible Invest-
ment 2016). While the SRI market is globally expanding
academic research is following. More than 2000 studies
have been published since the 1970s about environmental,
social and governance (ESG) criteria (Friede et al. 2015).
But contrary to the investment shares, the vast majority of
empirical studies has been focused on equity-linked rela-
tions, with only a small portion looking into fixed income
or real estate.
In line with the overall limited research on fixed-income
SRI, there is also hardly empirical evidence for a debt
instrument that is attracting a fast growing interest of
institutional asset managers while it was only recently
developed: the instrument helps to invest according to the
principles for responsible investment and is named green
Electronic supplementary material The online version of this
article (https://doi.org/10.1057/s41260-018-0088-5) contains supple-
mentary material, which is available to authorized users.
&Dirk Schiereck
schiereck@bwl.tu-darmstadt.de
Britta Hachenberg
britta.hachenberg@stud.tu-darmstadt.de
1
Technische Universitaet Darmstadt, Darmstadt, Germany
1
Other regions apart from Canada and Europe did not collect data on
asset allocation. Canada and Europe together represent more than
57% of sustainable assets (Global Sustainable Investment Alliance
2017).
2
http://www.iigcc.org/publications/publication/2014-global-investor-
statement-on-climate-change.
J Asset Manag (2018) 19:371–383
https://doi.org/10.1057/s41260-018-0088-5
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
... MacAskill et al. (2021) summarise several reasons for investor's preference towards sustainable investments, which include tax incentives, diversification motives, ESG engagement and reputational considerations. Moreover, there are extra costs for acquiring green bond certification or verification (Hachenberg and Schiereck, 2018). These reasons are expected to lower yield, which is called a 'greenium' (green bond premium). ...
... Alternative explanations of greenium look at confounding factors such as special tax credits or firm characteristics (Larcker and Watts, 2020;Tang and Zhang, 2020). Not all studies are able to find evidence of a greenium (Hachenberg and Schiereck, 2018;Flammer, 2021). These latter studies may suffer from a small sample size, while we would argue that other studies capture aspects that cause green labelling, and hence support the greenium hypothesis. ...
... Another explanation for inconclusive results, proffered here, relates to how greenium is modelled. Previous studies used pooled regression (Karpf and Mandel, 2018;Simeth, 2022), fixed effect (Zerbib, 2019;Bachelet et al., 2019) and random effect models (Hachenberg and Schiereck, 2018) and compared average yield spread (Larcker and Watts, 2020;Flammer, 2021). These studies implicitly assume that greenium is a mean unweighted difference between green bonds and non-green bonds (i.e., a constant). ...
View
... Second, while studies focusing on greenium such as Zerbib [18], Hachenberg and Schiereck [19], and Wang et al. [20] also include variables that have an impact on the greenium in their models. Kocaarslan [33] focuses on how the type of currency affects the investors' decisions regarding GBs by examining how U.S. dollars influence the GB investing. ...
... Kocaarslan [33] focuses on how the type of currency affects the investors' decisions regarding GBs by examining how U.S. dollars influence the GB investing. Hachenberg and Schiereck [19] illustrate the link between greenium and GB issuance costs for individual ratings, while connected to the currency. Previous studies on certified labels include Ehlers and Packer [5] and Sartzetakis [34], which show the development of certified labels in GBs along with the background of the global GB market. ...
Investigating Factors Affecting Institutional Investors’ Green Bond Investments: Cases for Beijing and Shenzhen
Article
Full-text available
  • Mar 2023
We conducted a survey of institutional investors in Beijing and Shenzhen to analyze the factors affecting green bond (GB) investing in China, such as credit rating, GB issuer, fund use, liquidity, redemption term, certification label, and type of currency. We then compared the results for Beijing and Shenzhen, including factors that affected greenium and the two cities’ willingness to pay (WTP). Using a double-bounded dichotomous choice contingent valuation method, we find that higher credit ratings tend to increase Beijing investors’ WTP and that the use of GB proceeds affects Shenzhen investors’ WTP. We also find that investors place importance on the type of currency, length of redemption term, and liquidity when investing in GB, while the certification label does not have an impact on WTP. The WTP for GB was higher among Shenzhen investors than among Beijing investors. These findings provide important insights for the government and financial institutions to take the right action to expand the GB market and to establish a GB framework that induces the financial sector toward reducing greenhouse gas emissions.
View
... This is confirmed by Azmi et al. (2021), who found a negative relationship between these initiatives and the cost of equity. Similarly, green bonds have better ratings and lower yields than conventional bonds, because environmentally friendly actions are highly valued by investors (Hachenberg & Schiereck, 2018). At the same time, sustainable compromises can avoid other sources of costs, such as those that come from legal and regulatory sanctions (Murè et al., 2021). ...
SUSTAINABLE BANKING, FINANCIAL STRENGTH AND THE BANK LENDING CHANNEL OF MONETARY POLICY
Article
  • Mar 2023
The aim of this article is to analyse how sustainable banking affects the transmission of monetary policy through the bank lending channel. We also quantify how these effects are determined by the financial strength of each bank. These objectives, which have not been studied previously, represent an important contribution because real sustainable concerns in banking did not emerged until recently, mainly with the adoption of the Sustainable Development Goals that should be reached by 2030. Since then, some studies have focused on the effects of sustainability on aspects such as bank profitability, risk or efficiency, but none has considered the effects on the bank lending channel of monetary policy. In fact, central banks have incorporated sustainability criteria into their agenda and are analyzing how to include these criteria in the monetary policy framework, so we contribute even more by shedding some light on these aspects and how they depend on the financial strength of the banking sector. We used quarterly data from 79 listed banks from the OECD between 2016 and 2019 (947 observations) and we found that the bank lending channel is operative either for banks with very low sustainability ratings or a weak financial position. When sustainability ratings increase and financial strength becomes moderate, the bank lending channel is ineffective and monetary shocks do not affect lending. For banks with certain sustainable compromises and a strong financial position, the impact of monetary shocks on lending is the opposite of the one that the bank lending channel proposes, and this impact is more intense as sustainability ratings increase. Finally, our results also show that increases in central bank assets boost lending only for banks with low or moderate sustainability ratings, regardless of their financial strength. Overall, these results suggest that more sustainable banks are less dependent on monetary policy decisions.
View
... Empirične študije (npr. Hachenberg in Schiereck (2018), Löffler, Petreski in Stephan (2021), Bank for International Settlements (2017)) kažejo, da zelene obveznice predstavljajo učinkovit instrument financiranja zelenih projektov in, kot navaja Caroline Flammer (2020), prispevajo k doseganju okoljskih ciljev ter hkrati k finančni uspešnosti podjetij. ...
View
Exploring the determinants of corporate green bond issuance and its environmental implication: The role of corporate board
Article
The exponential growth of the green bond market has generated an incipient debate in the literature about the causes and implications for companies employing this green financing. An unexplored issue is the role of the board. In this context, the aim of this research is two-fold. Firstly, we analyse whether companies that have issued green bonds during the 2013–2021 period are characterised over the previous two years by having certain corporate governance characteristics, such as having a sustainability committee or a board with a higher percentage of women. Secondly, we examine whether these companies improve their environmental performance post-issuance by considering these governance characteristics, as well as the certification of green bonds and the purpose of the funds. For this purpose, we employ up to five alternative environmental performance variables. Our overall results indicate that companies that issue green bonds have a higher environmental score, a lower volume of CO2 emissions, a board with a higher percentage of women and a sustainability committee. Moreover, such companies continue to perform certain environmentally friendly actions in the years after issuance. Furthermore, the results reflect that companies with poorer environmental scores may be using external certification of their emissions to improve their image.
View
Exponential Growth of Sustainable Debt: Green Bonds Surge
Chapter
  • Mar 2023
A significant number of investments are required to meet the target under the SDGs and internal financial resources of a country are not adequate to meet these requirements. Green bonds are one of the methods of raising finances for investments on full or partial capital expenditure of green projects. Since about the last 8–10 years, many institutions have started issuing of green bonds and this has been exponentially growing that by 2015, it has increased more than four times since its 2013 levels. In the year 2021, USA, China, Germany, France, and UK were the leading countries that have issued green bonds. Several emerging economies such as China, India, Poland, and Hungary have also issued green bonds during 2020–21. MDBs were the frontrunners in devising innovative ways of generating financial resources for addressing the climate, environment, and sustainability challenges. The third-party or independent certifications are sought after as they give better credence to the issuers of their intentions and to the investors that their funds have been rightly deployed. Many countries, regions, and institutions have developed their own taxonomies of the definition and process to be adopted for green bonds. Exchanges help investors invest in green bonds and other climate solutions and can act as a platform for developing indices that can accelerate the market. The current application of green bond proceeds is restricted to a few sectors such as the renewable energy, buildings, and transport. Green taxonomy will help in accelerating the existing levels of the investors’ inclination and understanding about how the green bonds work. This will also address the issue of greenwashing and increase the trust of the investors in the green bonds. Also, the taxonomy should be flexible enough to include various preferences of the different investors.KeywordClimate changeEvolution of green bondsGreen bondsGreen bonds marketSustainability
View
How do global financial markets affect the green bond markets? Evidence from different estimation techniques
Article
  • Mar 2023
The green bond market has significantly improved in recent years thanks to the development of financial instruments and the rising climate change concerns. Given this backdrop, this paper investigates the effects of returns in different financial markets, i.e. the United States Treasury Bonds, the Standard & Poor’s stock market, the United States Dollar, Gold, Crude Oil, and Bitcoin on the Green Bond returns (the Standard & Poor’s Green Bond Index) from September 17, 2014, to September 1, 2022. The results from the robust linear and machine learning estimators indicate that the returns of the United States Treasury Bonds and the United States Dollar are negatively related to the Green Bond returns. Meanwhile, Gold returns positively affect Green Bond returns. The quantile regression estimations of Machado–Santos Silva also show that these findings are valid in different quantiles. The paper also discusses policy implications related to climate change and the development of financial instruments to promote green investments.
View
Lower margins are tied to companies’ ESG rating rather than to low-carbon assets
Preprint
Full-text available
  • Feb 2023
Lenders are likely to face significant transition risk associated with stranded shipping assets, but whether and how such risks are incorporated in their lending practices is still an open question. The extend of this risk depends on whether banks are able to incorporate such risks in their lending activity. Our results show that lower margins are tied to shipowners’ ESG rating rather than to low-carbon ships. Banks penalized carbon efficient ships before the Paris Agreement, but they no longer do while they have started rewarding shipowners with better ESG performance since then. Signing the sectoral voluntary disclosure initiative (Poseidon Principles), leads lenders to request margins 2.4 percentage points lower for companies with high ESG ratings, compared to those with the low scores. However, the Poseidon Principles does not impact the pricing of ships’ carbon intensity, casting doubts on the capacity of disclosure initiatives to change investment outlays.
View
Sustainable debt and gas markets: A new look using the time-varying wavelet-windowed cross-correlation approach
Article
This paper examines the time-varying interactive linkages between the sustainable debt market and gas markets, applying unique estimation techniques, specifically the empirical mode decomposition (EMD)-windowed-cross-correlation (EMD-WCC) and wavelet-windowed-cross-correlations. To this end, we use the S&P Green Bond Index as a representative of a sustainable debt market while for the gas market, we use natural gas price indices of UK NBP (National Balancing Point), NYMEX HH (Henry Hub) and US shale gas prices. The lead/lag behavior amid green-bonds along with shale gas, also with natural gas markets has equal forces across all time scales. There exists weak cross-correlation across green bonds and shale gas markets and additionally, green bonds and natural gas markets in the short-run. Such findings imply that, from the perspective of the investors, in the short-run, green bonds have ample diversification benefits. The highest intensity of cross-correlations is observed in the longer time horizons. This evidence suggests that in the long-run the behavior of the markets is driven by its own peculiarities. Overall, our findings support the argument that green bonds with their climate-friendly properties add to the diversification benefits for investors, as a newer class of asset for portfolio investments.
View
Interdependence of clean energy and green markets with cryptocurrencies
Article
The adverse effects of the high-power energy consumption by cryptocurrencies on the environment and sustainability have raised the interest of a large body of policymakers and market participants. We apply a network approach to investigate the dependency across clean energy, green markets, and cryptocurrencies from 1 January 2018 to 30 November 2021. Our results indicate that sustainable investments, particularly DJSI and ESGL, play a pivotal role in the network system during the COVID-19 crisis. We find that green bonds are the least integrated with the other financial markets, suggesting their significant role in providing diversification benefits to investors. Rolling windows estimation shows that the dependency across the examined marked increased sharply during the COVID-19 crisis, especially between March 2020 and March 2021, after which it faded and became weak and stable until the end of the sample period. Results of the centrality network are consistent with the dependency network analysis.
View
View
View
View
View
The Relationship between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements
Article
  • Jan 2004
A company’s credit default swap spread is the cost per annum for protection against a default by the company. In this paper we analyze data on credit default swap spreads collected by a credit derivatives broker. We first examine the relationship between credit default spreads and bond yields and reach conclusions on the benchmark risk-free rate used by participants in the credit derivatives market. We then carry out a series of tests to explore the extent to which credit rating announcements by Moody’s are anticipated by participants in the credit default swap market.
View
View
View
The effect of ratings announcements, on firms in bank-based systems
Article
  • Jan 2015
Rating agencies act as intermediaries for investors in evaluating the creditworthiness of borrowers. The role of ratings agencies is particularly crucial in market-based systems, because, in contrast to long-run bank relationships, outside investors are confronted with greater obstacles to in-depth and reliable evaluations of firm credit risk. The financial intermediation in bank-based systems has implications for the role and the focus of credit rating agencies. This study examines the influence of ratings announcements in Germany, one of the premier bank-based systems. During the study period, from January 2000 through June 2014, we examine 189 Standard & Poor's and 204 Moody's ratings announcements. Our results show that ratings announcements are less important in the German market than in marketbased systems such as the United States.
View
ESG Ratings and Performance of Corporate Bonds
Article
  • Jun 2016
The authors study the historical relationship between environmental, social, and governance (ESG) ratings and corporate bond spread and performance, finding that corporate bonds with high composite ESG ratings have slightly lower spreads, all else being equal. They also find that bonds with high ESG ratings have modestly outperformed their lowerrated peers when controlling for various risk exposures. They provide details on the effects of individual E, S, and G scores on performance. The outperformance of lowESG issuers by their highESG peers through the past eight years has not been accompanied by increasing relative valuation. This suggests that the ESG performance gain is not a consequence of buying pressure and therefore might be retained.
View
View