The New Law of Corporate Bonds; Survival of the Greenest? Evidence of Greenium in the US and European Bond Markets

Abstract

Climate crisis and enhancing sustainability now play a crucial role in the global economy. The international community is actively collaborating to devise effective strategies to strengthen a sustainable and rational green transition. Governmental bodies, the corporate sector, and financial markets are pivotal in this transition. This thesis investigates one innovative, sustainable financial instrument: Green bonds, primarily corporate green bonds, issued in the US and European markets. A sample of 12,541 corporate bonds issued between 2013 and 2023 is investigated to see whether green bonds achieve lower funding costs than conventional bonds, a phenomenon known as greenium.

The study employs four regressions and three propensity score matching analyses, with yield to maturity as the dependent and treatment variable, representing issuers' funding costs. The models control for issue characteristics, issuer attributes, and market conditions at issuance. The regressions explore variations with interaction terms and different explanatory variables. In the propensity score matching, green bonds are the treatment group and conventional bonds the control group, with both average treatment effect and average treatment effect on the treated reported.

The analyses findings provide support for the presence of a greenium. The results from the regressions indicate differences in funding costs estimated to range between -50.4 bps and -35.8 bps. Propensity score matching yields estimated values of -21.8 bps and -16.7 bps as the average effect of issuing a green bond. Further refinements lead to an average effect of issuing a green bond, among issuers of green bonds, of -40.7 bps.

Additionally, the results document that the longer maturity of a bond, the higher the funding cost for the issuer. It is also shown that an increased term spread results in lower financing costs, and that higher yields on one-year government bills result in higher funding costs for issuers of corporate bonds.

Climate crisis and enhancing sustainability now play a crucial role in the global economy. The international community is actively collaborating to devise effective strategies to strengthen a sustainable and rational green transition. Governmental bodies, the corporate sector, and financial markets are pivotal in this transition. This thesis investigates one innovative, sustainable financial instrument: Green bonds, primarily corporate green bonds, issued in the US and European markets. A sample of 12,541 corporate bonds issued between 2013 and 2023 is investigated to see whether green bonds achieve lower funding costs than conventional bonds, a phenomenon known as greenium.

The study employs four regressions and three propensity score matching analyses, with yield to maturity as the dependent and treatment variable, representing issuers' funding costs. The models control for issue characteristics, issuer attributes, and market conditions at issuance. The regressions explore variations with interaction terms and different explanatory variables. In the propensity score matching, green bonds are the treatment group and conventional bonds the control group, with both average treatment effect and average treatment effect on the treated reported.

The analyses findings provide support for the presence of a greenium. The results from the regressions indicate differences in funding costs estimated to range between -50.4 bps and -35.8 bps. Propensity score matching yields estimated values of -21.8 bps and -16.7 bps as the average effect of issuing a green bond. Further refinements lead to an average effect of issuing a green bond, among issuers of green bonds, of -40.7 bps.

Additionally, the results document that the longer maturity of a bond, the higher the funding cost for the issuer. It is also shown that an increased term spread results in lower financing costs, and that higher yields on one-year government bills result in higher funding costs for issuers of corporate bonds.