How Useful are Green Bond Use of Proceeds? Environmental Performance and Capital Market Response

Green bonds are growing in popularity, both as a financial tool and a path toward responsible investing. This brings a demand for measurement of both financial and environmental performance of these instruments. Yet analysis of the latter is largely missing, and that which exists is noisy, due to vague green bond commitments and difficulty in measuring outcomes in general corporations. Avis Devine, Nils Kok, Halil Ozgur, and Erkan Yonder capitalize on the uniquely clean nature of REIT green building investments to measure the environmental performance of green bonds, and then analyze the response of capital markets to green bond issuance. We find evidence that green bond issuance leads to enhanced environmental performance for a firm within a two-year horizon. We also find that capital markets appear to evaluate green bond issuers as lower risk investments, offering bond spread discounts to green bond issuers as well as increased access to equity.

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