Two essays on green bond premium

Abstract

Chapter 1: Existing studies argue that, among various types of external review, only second- party opinion (SPO) can significantly boost the green premium (Greenium) of a green bond owing to its informativeness. Yet it remains unclear what information induces investors to confer additional Greenium. In response, we analyze 121 SPO statements and find that 80% of them provide an assessment of the issuer’s past sustainability performance in addition to an opinion on the green bond framework. This suggests green bond investors may not merely care about the greenness of the use of proceeds. We conduct an empirical analysis of the relationship between Greenium and issuers’ decarbonization records using a matched sample of green and conventional bonds. We find that, after controlling for SPO and other variables, investors confer a larger Greenium to green bonds whose issuers have a better decarbonization record. Indeed, the latter also magnifies the impact of SPO on Greenium. This is consistent with our theoretical postulation that a good decarbonization record could signal that the issuer has sufficient capacity to execute its green projects, which affects the expected green impacts of the green bond. Our results show that green bond investors actively utilize additional information about the issuer to gauge the credibility of a green bond beyond its external review. Chapter 2: The Portfolio Decarbonization Coalition (PDC) suggests that investors divest from carbon intensive companies. As such, this paper investigates the cost of capital facing high emitters in the corporate green bond markets. Using a sample of 151 matched bond pairs, we find that high emitting green bond issuers face a discount in their green bond premium (Greenium). The relation between an issuer’s emissions performance and its green bond pricing is moderated by external review. In fact, the marginal impact of second-party opinion (SPO) statement on Greenium is larger for issuers with higher emissions intensities. Our results suggest that green bond investors are ex-ante more cautious about investing in high emitters, and require more proof of the latter’s credibility before conferring Greenium to support their green projects. As such, the positive signal conveyed by external review is more important to high emitting green bond issuers by distinguishing them from other high emitters who less likely to bring expected green impacts from executing the green projects.

Date of Award	2024
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology
Supervisor	Keith CHAN (Supervisor) & Alexis Kai Hon LAU (Supervisor)