Exploring the Green Premium in Corporate Green Bonds

This paper studies the pricing of green corporate bonds in the global bond market from January 2019 to July 2019 to determine the impact of pro-environmental preferences on bond prices. We employ a matching methodology in combination with regression analysis to isolate the difference in the yield that is attributable to the green label of a green corporate bond, where a negative yield difference indicates a positive green premium. We find a small green premium of -1.5 basis points, indicating a lower yield for green bond investors and a lower cost of funding for issuers than a comparative conventional bond. We find that financial green bonds and non-financial green bonds have green premia of -3.1 and 1.2 basis points, respectively. This negative green premium in non-financial green bonds is concentrated in green bonds issued by firms with high pollution, with transition bonds having a negative green premium of 2.2 basis points. These results indicate a willingness of investors to accept lower returns in exchange for the funding of environmental projects through green bonds, except when those green bonds are issued by highly environmentally damaging companies.