The Effect of Sustainability on Bond Pricing : An empirical study of bonds issued by Norwegian savings and commercial banks

Abstract

We find that Norwegian banks pay lower bond coupon rates for displaying sustainabilityrelated characteristics or for issuing green bonds. Using data on bonds issued by 29 Norwegian banks in the primary market, we estimate the causal effect of having a sustainability strategy, receiving an ESG rating or being a savings/commercial bank on the coupon rate for both conventional and green bonds. We find that, isolated, banks pay lower coupon rates when issuing green bonds compared to conventional bonds. Furthermore, through using nearest neighbor propensity score matching (NN-PSM), we find that conventional bonds issued by banks that are early adopters of a sustainability strategy have higher coupon rates than those of banks that are late adopters of a sustainability strategy. Moreover, we find that conventional bonds issued by banks with higher ESG ratings have lower coupon rates than conventional bonds issued by banks with lower ESG ratings. Finally, we find that conventional bonds issued by savings banks have lower coupon rates than conventional bonds issued by commercial banks. However, we find no significant effect of the combination of these characteristics with the issuance of green bonds on the coupon rate. Our findings are robust to correlations on the issuer level, and suggest that bank characteristics are more important than offering green products in order to achieve a lower cost of debt for Norwegian banks when contributing to the green transition.