I Can See Your Green Halo: Exploring the Role of Green Bond Issuance, Environmental Transparency, and Green Preferences on the Cost of Debt in European Markets

Abstract

We find that European issuers benefit from lower bond coupon rates by issuing green bonds or demonstrating environmental transparency. Analyzing data from 9,041 issued by 1,779 issuers, we evaluate the impact of green bond issuance and transparency. Utilizing a Difference-in-Differences model (DiD), we find evidence of a green debt halo effect, with Scandinavian bonds experiencing a 114 basis point reduction in coupon rates. Additionally, we employ a nearest neighbor propensity score matching (NN-PSM), suggesting the existence of a greenium. However, we find no significant difference in greenium between Scandinavian and non-Scandinavian bond issuances. Using OLS regression and fixed effects models, we observe a reduction of 2 bps in green bond coupon rates for each additional page in the issuer's green bond framework. This effect is not evident when considering Scandinavian bonds. Overall, our thesis emphasizes the importance of environmental practices and green bonds in influencing capital costs for European businesses, providing insights for issuers, investors and regulators.

We find that European issuers benefit from lower bond coupon rates by issuing green bonds or demonstrating environmental transparency. Analyzing data from 9,041 issued by 1,779 issuers, we evaluate the impact of green bond issuance and transparency. Utilizing a Difference-in-Differences model (DiD), we find evidence of a green debt halo effect, with Scandinavian bonds experiencing a 114 basis point reduction in coupon rates. Additionally, we employ a nearest neighbor propensity score matching (NN-PSM), suggesting the existence of a greenium. However, we find no significant difference in greenium between Scandinavian and non-Scandinavian bond issuances. Using OLS regression and fixed effects models, we observe a reduction of 2 bps in green bond coupon rates for each additional page in the issuer's green bond framework. This effect is not evident when considering Scandinavian bonds. Overall, our thesis emphasizes the importance of environmental practices and green bonds in influencing capital costs for European businesses, providing insights for issuers, investors and regulators.