The past five years have seen explosive growth in “corporate green bonds” issued to finance climate-friendly projects. While investors bought just $3 billion of these bonds in 2013, they scooped up $49 billion worth in 2017, bringing the total sold since 2013 to $113 billion at an average of $308 million per offering. A wide range of companies including Apple, Unilever, and Bank of America have issued green bonds in recent years, and the trend is likely to continue. Despite this boom, little is known about the impact of these bonds. Have they delivered positive environmental results? Do they contribute to the issuing companies’ financial performance? The answer to both questions is a resounding yes.
In a recent analysis of the 217 corporate green bonds issued by public companies globally from January 1, 2013 to December 31, 2017, I show that they yield a positive stock market reaction, improvements in financial and environmental performance, an increase in green innovations, and an increase in stock ownership by long-term and green investors.
How the stock market responds
The issuers’ stock price increases around the announcement of green bond offering, indicating that investors expect the bonds to contribute to shareholder value. (New information is provided to the market on the announcement date, as opposed to the issue date. Further, the analysis includes the announcement date and the previous trading day to account for the possibility that some information may have been known to the public prior to the announcement). In this two-day event window the average cumulative abnormal return (CAR)—that is, the stock return in excess of the “normal” market return was 0.67%. So, if the stock market (say, the S&P500 index) goes up by 1% over these two days, the stock of the green bond issuer increases, on average, by about 1.67%. All other periods before and after the two-day event window yield insignificant CARs, which confirms that the results are not driven by unrelated trends around the time of the announcement.
These results hold virtually steady even when adjusted for industry-specific performance and potentially confounding events like the announcement of equity issues, regular bond issues, or quarterly earnings. Results do differ, however, depending on several variables.
First, the stock price increase around the announcement of the bond issue is about twice as large for green bonds that have been certified by independent third parties such as Sustainalytics, Vigeo Eiris, Ernst & Young, and CICERO. Some 69% of corporate green bonds were certified by independent third-parties to establish that the proceeds are funding projects that generate environmental benefits. Certification is rigorous and costly, so certified green bonds likely represent a more credible commitment toward the environment, which could explain the stronger stock market response.
Second, the stock price increase is larger for companies operating in industries where the natural environment is financially material to the firms’ operations. For those companies, green projects contribute more substantially to financial performance.
Third, the announcement returns are larger for first-time issuers, compared to seasoned issuers. Arguably, first-time green bond issues, compared to seasoned issues, are more likely to provide new information to the investor community about the firm’s environmental commitment going forward. The second and third time around investors are already aware of the firm’s commitment to sustainability, which is reflected in a weaker stock market reaction.