Assignment

FINANCIAL MARKETS

Green Bonds Benet Companies, Investors, and the Planet by Caroline Flammer

NOVEMBER 22, 2018

MONALYN GRACIA/CORBIS/VCG/GETTY IMAGES

The past five years have seen explosive growth in “corporate green bonds” issued to finance climate-

friendly projects. While investors bought just $3 billion of these bonds in 2013, they scooped up $49

billion worth in 2017, bringing the total sold since 2013 to $113 billion at an average of $308 million

per offering. A wide range of companies including Apple, Unilever, and Bank of America have issued

green bonds in recent years, and the trend is likely to continue. Despite this boom, little is known

about the impact of these bonds. Have they delivered positive environmental results? Do they

contribute to the issuing companies’ financial performance? The answer to both questions is a

resounding yes.

In a recent analysis of the 217 corporate green bonds issued by public companies globally from

January 1, 2013 to December 31, 2017, I show that they yield a positive stock market reaction,

improvements in financial and environmental performance, an increase in green innovations, and

an increase in stock ownership by long-term and green investors.

 How the stock market responds

The issuers’ stock price increases around the announcement of green bond offering, indicating that

investors expect the bonds to contribute to shareholder value. (New information is provided to the

market on the announcement date, as opposed to the issue date. Further, the analysis includes the

announcement date and the previous trading day to account for the possibility that some

information may have been known to the public prior to the announcement). In this two-day event

window the average cumulative abnormal return (CAR)—that is, the stock return in excess of the

“normal” market return was 0.67%.  So, if the stock market (say, the S&P500 index) goes up by 1%

over these two days, the stock of the green bond issuer increases, on average, by about 1.67%. All

other periods before and after the two-day event window yield insignificant CARs, which confirms

that the results are not driven by unrelated trends around the time of the announcement.

These results hold virtually steady even when adjusted for industry-specific performance and

potentially confounding events like the announcement of equity issues, regular bond issues, or

quarterly earnings. Results do differ, however, depending on several variables.

First, the stock price increase around the announcement of the bond issue is about twice as large for

green bonds that have been certified by independent third parties such as Sustainalytics, Vigeo Eiris,

Ernst & Young, and CICERO. Some 69% of corporate green bonds were certified by independent

third-parties to establish that the proceeds are funding projects that generate environmental

benefits. Certification is rigorous and costly, so certified green bonds likely represent a more credible

commitment toward the environment, which could explain the stronger stock market response.

Second, the stock price increase is larger for companies operating in industries where the natural

environment is financially material to the firms’ operations. For those companies, green projects

contribute more substantially to financial performance.

Third, the announcement returns are larger for first-time issuers, compared to seasoned issuers.

Arguably, first-time green bond issues, compared to seasoned issues, are more likely to provide new

information to the investor community about the firm’s environmental commitment going forward.

The second and third time around investors are already aware of the firm’s commitment to

sustainability, which is reflected in a weaker stock market reaction.

 Improvements in financial performance

Green bond offerings are also associated with a 2.4% increase in long-term value, measured by the

ratio of the firm’s market value to the book value of its assets. (All results are averages across all

green bond issues.) Moreover, issuers of green bonds, compared to a control group of companies

that issue bonds but not green bonds, saw an improvement in operating performance as measured

by the return on assets (ROA). In the long run (two years after the green bond issue), ROA increases

by 0.6 percentage points. Because investments in green projects take time to pay off, higher

operating profits only appear after two years, while no effect is found in the short run.

 Better environmental performance and more green innovations

Several measures suggest that after issuing green bonds companies improve their environmental

performance. Their environmental score rose 6.1 percentage points on the Thomson Reuters’

ASSET4 scale, which is based on more than 250 key performance indicators such as CO2 emissions,

hazardous waste, recycling, and so on. They reduced their emissions by 17 tons of CO2 per $1

million of assets. Moreover, they increased their green innovations―measured by the ratio of the

number of “green” patents filed to the total number of patents they filed in a given year― by 2.1

percentage points.

Increase in ownership by long-term and green investors

Companies that issue green bonds also appear to adopt longer time horizons—which is particularly

important given rising concerns about corporate short-termism. The long-term index (a measure of

long-term orientation based on a textual analysis of the firms’ annual reports) of green bond issuers

increases by 3.9 percentage points. Corporate green bonds also help attract investors who care about

the long term and the environment. The share of long-term investors increases from 7.1% to 8.6% (a

21% increase), and the share of green investors from 3% to 7% (a 75% increase).

Taken together, the findings that green bonds trigger a positive market response, improve financial

and environmental performance, and attract long-term and green investors, suggest that this

relatively recent innovation in impact investing holds significant promise for fighting climate change

globally—whether governments act or not.

Caroline Flammer is an Associate Professor of Strategy and Innovation and a Dean’s Research Scholar at the Boston University Questrom School of Business.

Related Topics: S O C I A L R E S P O N S I B I L I T Y | S U S TA I N A B I L I T Y | I N N O VAT I O N

This article is about FINANCIAL MARKETS

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