Why Do Firms Issue Green Bonds?

Different Shades of Green: Estimating the Green Bond Premium using Natural Language Processing

“…Our findings are inconsistent with the view that green bonds are merely a tool for companies to signal their commitment toward the environment (e.g. Flammer (2021); Daubanes, Mitali, and Rochet (2021)). If that were the only case, one would not observe a premium for bond issuance, nor a discount on bonds' coupon rates.…”

“…Our paper also speaks to the growing literature that studies the rationale for green bonds' issuance (Flammer (2021); Daubanes, Mitali, and Rochet (2021); Pástor, Stambaugh, and Taylor (2021)). Pástor, Stambaugh, and Taylor (2021) show that agents' tastes for green holdings affect asset prices -investors are willing to pay more for greener firms thereby lowering the firms' costs of capital.…”

“…Our paper contributes to the emerging literature that studies sustainable investing (Pástor, Stambaugh, and Taylor (2021)) with a focus on the development of the green bonds market (Karpf and Mandel (2017); Hachenberg and Schiereck (2018); Baker, Bergstresser, Serafeim, and Wurgler (2018); Gianfrate and Peri (2019); Zerbib (2019); Larcker and Watts (2020); Tang and Zhang (2020); Flammer (2021); Bedendo, Nocera, and Siming (2022); Daubanes, Mitali, and Rochet (2021)). Most studies in this area revolve around three main aspects: Why do companies choose to issue green bonds?…”

“…A recent development in corporate finance has been the issuance of green bonds as debt instruments whereby the issuer commits to allocate the use of proceeds to finance projects with environmental benefits (Flammer (2021); Bedendo, Nocera, and Siming (2022)). 1 In the past few years, the increasing number of firms' commitment led to an exponential growth in the green bond market, which has reached $1tn by the end of 2020 (Kapraun, Latino, Scheins, and Schlag (2021)) and expanded to around 3.5% of total corporate bond issuance (Daubanes, Mitali, and Rochet (2021); Bremus, Schütze, and Zaklan (2021)).…”

“…In her seminal paper, Flammer (2021) uses a matching strategy to provide evidence supporting a signaling argument whereby firms issue green bonds to credibly signal their commitment toward the environment. Daubanes, Mitali, and Rochet (2021) present a theoretical model in which firms undertake green projects because of managerial incentives to signal the profitability of green projects and affect firm's stock price. Our results indicate that issuing green bonds also decrease firms' cost of capital raised via conventional debt instruments.…”