The Price of Green: An Empirical Study of Green Bond Pricing

Victoria Krogh S√łgaard

Student thesis: Master thesis


This paper explores the impact of environmental preferences on the pricing of financial assets, with green bonds as the subject matter of analysis. The rising concern for climate change has fuelled an increasing demand for investments with superior environmental profiles. In turn, this demand has led to a surge in the growth of the market for green bonds, in particular within the second half of the past decade. While the extant literature on the pricing of socially responsible investments contra conventional investments is abundant, few studies attempt to separate the effects of investor preferences for and financial materiality of the issues considered. This study is different as the methodological approach ensures complete separation of the effect of preferences from the potential impact of the environmental performance on company value.
For the matched pairs sample where each green bond is paired with an otherwise identical synthetic conventional bond from the same issuer, any within-pair yield difference will, in theory, result from preferences. This is so as the two bonds share similar priority and are not ringfenced and thus, both bonds should experience an equal impact of the financial materiality of company-level environmental performance.
The empirical analysis provides evidence of a statistically significant greenium, a yield difference between green and conventional bonds, equal to -1.125 basis points. Furthermore, it reveals the presence of substantial variation in the bond-specific greenium estimates. Specifically, for issuers within the private sector, the greenium decreases as credit quality deteriorates. While initial examinations suggest that financial issues are priced at a greenium closer to zero than non-financial corporate and development bank issues, the evidence of the OLS regressions applied to investigate the cross-sectional variation in the greenium does not support that hypothesis. In contrast, the results of the regressions do provide weak support of the hypothesis that signals which succeed in mitigating the informational asymmetry between issuer and investors predict a larger negative value of the greenium. An ESG issuer rating with a high environmental pillar subscore appears to be the superior signal of those investigated, predicting an, albeit statistically insignificant, 1.138 basis points decrease in the greenium.
In conclusion, this study shows that the pricing impact of pro-environmental preferences is statistically significant, though insignificant in economical terms. Investors would hardly consider the minor pricing differential as a barrier to investing in green bonds. However, the statistical significance of the negative estimate suggests that there is headroom for the issuance of more green debt. Furthermore, the pricing implications of asymmetrical information indicates that measures to increase market-wide transparency could spur market growth even further.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2020
Number of pages82
SupervisorsJens Dick-Nielsen