A study shows that green bonds create long-term value for corporate issuers and also reduce their environmental footprint, making them a powerful tool for addressing climate change. The market for green corporate bonds, which are designated for financing environmentally friendly projects and businesses, have undergone a boom in the past five years. From an issuance of just $3 billion in 2013, the market has ballooned to $49 billion last year, although this is still just a fraction of the size of the total bond market.
A study of green corporate bonds has found that their measurable impact – on both the environment and on the financial and long-term performance of the corporates that issue them – is considerable. In her paper, Caroline Flammer, of Boston University, says that “green bonds are effective – companies invest the proceeds in projects that improve the company’s environmental footprint and contribute to long-term value creation – and help attract an investor clientele that is sensitive to the environment.”
Flammer identified five main advantages for the issuers of green corporate bonds:
- positive announcement returns,
- improvements in long-term value and operating performance,
- improvements in environmental performance,
- increases in green innovations, and
- an increase in ownership by long-term and green investors.
Powerful tool against climate change
In possibly the first academic paper to study the financial and environmental effects of green bonds, Flammer notes that “if corporate green bonds are effective in improving both a firm’s financial and environmental performance, they could serve as a powerful tool against climate change”. For the study, Flammer compiled a database of green corporate bonds, with data on all green bonds issued by public and private companies globally since 2013. Analysis of this data showed several interesting trends:
- The stock markets respond positively to the announcement of green bond issues. Flammer writes: “the cumulative abnormal return (CAR) is 0.67%, suggesting that corporate green bonds are value-enhancing”. This means that, with data adjusted for other influencing factors, the issuer's stock price does better on the day of a green bond's announcement, suggesting that investors expect the green bond to contribute to shareholder value.
- This stock price increase is twice as large when the green bond is certified by a third party – Flammer names Sustainalytics, Vigeo Eiris, Ernst & Young and CICERO as providers of independent certification that the proceeds of bonds are financing projects that generate environmental benefits.
- Companies in industries where the natural environment is financially material to the firms’ operations also see greater stock price increases at the time of a green bond announcement.
- The stock market has a greater reaction to the announcements of first-time green bond issuers. Flammer says this could be down to first-time issuers being “more likely to provide new information to the investor community about the firm’s environmental commitment going forward”.
- Flammer's research also found that green bond offerings are associated with a 2.4 per cent increase in long-term value for the issuing corporate – compared to issuers of 'non green' bonds. She measured this using the ratio of the firm’s market value to the book value of its assets.
- Two years after the issuance of a green bond, the issuer saw on average a return on assets increase of 0.6 percentage points.
- Companies lessen their environmental footprint after issuing a green bond, with average environmental score on the Thomson Reuters’ ASSET4 scale increasing by 6.1 percentage points, as well as a measurable reduction in CO2 emissions and increased number of green innovations.
- Finally, Flammer's research found that corporate green bond issuers focus on longer time horizons and are able to attract investors who are committed to the environment and long-term view.
CTMfile take: This research shows that using green bonds to finance environmentally friendly operations doesn't just tackle climate change but also has a measurable financial benefit for companies. Green corporate bonds are an important tool in the fight to reduce the environmental footprint of big businesses.
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