Practical Vitality of Green Bonds and Economic Benefits

Abstract

Climate change is an overarching challenge for achieving sustainable development. “Green” or “Climate” Bonds are often seen as a financial instrument that may help overcome low-carbon investment defiance. This paper explores green bonds’ potential contribution to low-carbon transition and the corporate sector’s benefit following the stock market reaction. This paper focuses on a new and fascinating subject because the green bonds market is under constant scrutiny since the emergence of the first green bond in 2007. Anticipating the significance of action towards climate change is continuously increasing over time. This project can be seen as a supporting argument for investing in green bonds and fighting against climate change. This study investigates the recent developments and challenges in the green bond market. I used matching criteria and performed multivariate OLS regression to test whether the green bond is priced differently than conventional ones. The result finds that green bonds are cheaper than conventional bonds with a 1.93–2.24 per cent premium, consistent with prior studies in this topic. I used a sample of 200 corporate green bonds issued after the Paris Agreement, i. e., from December 2015 to December 2019. I further document that the stock market reacts positively to green bonds’ announcements. For this, I performed the CAR test on a company’s stock price, which gives a statistically significant abnormal return of 0.23 per cent and 1.14 per cent over time windows 10 and 20 days, respectively. Moreover, green bonds’ environmental performance on carbon emission reduction proved to be an insignificant player. For this, I tested a relationship between green bond labels and the firms’ carbon emission. The mixed results suggest that maybe green bonds are performing well economically, but it is still far from achieving its practical goal.