Do Green Bonds Actually Lead to Rosy Returns?
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Finance & Accounting Apr 1, 2024

Do Green Bonds Actually Lead to Rosy Returns?

And are the companies that issue them truly addressing climate issues? New research investigates.

Man paints outside of factory with green paint on a roller.

Lisa Röper

Based on the research of

Aaron Yoon

Sanjai Bhagat

Summary Green bonds allow companies to raise funds, ostensibly for efforts related to the environment. However, skeptics argue these instruments amount to little more than greenwashing. New research supports this critical view, revealing that stock prices, ESG scores, and emissions do not improve following green-bond issuance. What’s more, it appears companies are using green bonds to raise quick cash and cover for poor financial performance.

Green bonds have taken off quickly over the past decade, ballooning into a $1.5 trillion market. Since 2013, corporations in more than 25 countries have issued bonds—ostensibly to finance environmental projects, such as renewable energy installations, pollution removal, and land conservation, although firms do not have to disclose exactly how the money is spent.

Advocates argue that green bonds, which signal serious climate commitments, can increase a company’s stock price. In this view, “green stakeholders” including investors, customers, and employees prefer to engage with firms they perceive as eco-friendly. Indeed, some recent research has backed up the notion that offering green bonds boosts both a company’s stock prices and its environmental performance.

However, there has been recent concern about greenwashing. Skeptics argue that businesses fail to match the environmentally friendly messages. This raises the possibility of greenwashing with green bonds as well.

Do green bonds actually lead to rosy stock returns? And are the companies that issue them walking the walk?

New research by Aaron Yoon, an assistant professor of accounting and information management at Kellogg, investigates those questions. With coauthor Sanjai Bhagat of the University of Colorado Boulder, Yoon compares companies’ stock prices, greenhouse-gas emissions, and environmental, social, and governance (ESG) scores surrounding the timing of their green-bond announcements.

Performing a series of comprehensive tests, Yoon and Bhagat find that the stock market does not react positively when corporations issue green bonds. In addition, companies that offer green bonds show no evidence of either reducing their emissions or elevating their scores on industry-standard ESG ratings. In other words, the projects funded by green bonds are clearly not as impactful as these companies want the public to believe.

However, firms releasing green bonds have one thing in common: problems with profitability in the announcement year.

“Essentially, our results are consistent with the following: firms are using green-bond issuance to cover for their poor business performance,” says Yoon.

Separating hype from fact

Yoon and Bhagat conducted a battery of tests to arrive at these findings. To explore whether corporations’ debuts of green bonds affected stock returns, they gathered 1,560 green-bond announcements issued between 2013 and 2022. Then, they tracked the stock prices of each of these companies within a three-day span: before, on, and after issuing a green bond.

“In order to justify their green bonds, [businesses] would need to communicate better on what they’re doing, what the outcome is, and how the proceeds are used.”

Aaron Yoon

The result? Firms did not experience a spike in their stock prices after releasing news about a green bond. Nor did announcements of a first green bond appear to make a splash in the market compared with subsequent announcements.

This remained true when researchers dove deeper and explored results for businesses based in different countries. Further, they found no change after dividing the data into two sub-periods, the nascent years of green bonds from 2013 to 2018, as well as the more recent period from 2019 to 2022.

Green—or greenwashed?

If investors don’t favor companies that offer green bonds, do these financial instruments at least reflect an uptick in climate-friendly corporate activity?

To explore this possibility, the researchers separately explored firms’ annual greenhouse gas emissions before and after the green-bond announcements, for each of the years between 2013 and 2022. They also compared the emissions of bond-issuing companies against companies of similar sizes in similar industries that did not issue green bonds.

The result? Greenhouse gas emissions failed to fall after firms announced green bonds.

Next, researchers investigated businesses’ ESG scores from MSCI, a popular data source that measures organizational resilience to ESG risks. Its ESG scores are weighted according to the materiality of 37 key issues MSCI identifies as relevant for investors.

Once again, companies’ ESG scores did not lift after they issued green bonds.

Finally, Yoon and Bhagat followed a new thread, exploring firms’ profitability ahead of and following their offers of green bonds. What they uncovered offered another wrinkle in the narrative: in the year ahead of a green-bond announcement, firms exhibited an abnormal return on assets. In other words, poor business performance preceded a company’s green-bond announcement. This suggests that firms may be using green bonds largely to raise quick cash.

The need to verify

In advance of the study, Yoon hoped to verify previous research tying green bonds to a rise in stock prices. “After all, if green bonds are good for businesses and the planet, they would provide a valuable win–win.”

“However, that’s not what we found,” he says.

Instead, their analysis favors the view that many companies are greenwashing when they offer green bonds. One problem is that firms don’t have to prove they’re living up to their ESG claims, including around green bonds. “It’s very difficult to verify what firms are actually doing … and we are in the very nascent stages of verifying firm claims about the environment,” says Yoon.

What is the takeaway for companies that intend to use green bonds to fund climate-friendly efforts toward decarbonization and nature restoration?

“I don’t think businesses should stop issuing green bonds, per se, but be more transparent on what they are doing,” Yoon says. “In order to justify their green bonds, they would need to communicate better on what they’re doing, what the outcome is, and how the proceeds are used.”

The findings call for proper oversight of green bonds and other green products to help investors and regulators, he adds. “It’s an incredibly nascent stage.”

Featured Faculty

Assistant Professor of Accounting & Information Management

About the Writer

Elsa Wenzel has covered business, technology, and sustainability for GreenBiz, PCWorld, CNET, the Associated Press, and Mother Jones. She holds an MS from the Medill School of Journalism at Northwestern and a BA from the University of Iowa.

About the Research

Bhagat, Sanjai, and Aaron Yoon. 2023. “Corporate Green Bonds: Market Response and Corporate Response.” Working paper.

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