Is “Greenness” Priced in the Market? Evidence from Green Bond Issuance in China

Abstract

Green bonds are bonds with a defined use of proceeds toward mitigating and adapting to climate change and solving environmental problems. Although the green bond market has expanded rapidly in recent years and has attracted great investment attention, whether investors can identify greenwashing behaviors remains a primary concern. This article takes advantage of the unique feature of the Chinese green bond market that allows a proportion of the proceeds to be used for nongreen purposes. The authors find that greener bonds (more proceeds are used for green projects) are sold at a premium. This pricing differential is primarily driven by bonds with proceeds used 100% for green projects. The authors also show that green bonds verified by a third party have lower yield spreads and the effect is stronger for more reputable third parties. Overall, the results suggest that investors reward only fully green bonds and that investors can discern “greenwashing.”

TOPICS: Portfolio theory, portfolio construction, ESG investing

Key Findings

• • The authors measure greenness by the share of proceeds used for green purposes.

• • Within-sample comparisons show that there is a premium for greener bonds and the effects are concentrated in bonds that are 100% green.

• • Verified green bonds are sold at a premium, and the pricing differentials are more pronounced for more reputable verifiers.