How the Stock Market Rewards Green Bond Issuers : A Comparison of the Issuers’ Environmental Profiles

Abstract: As global warming is becoming a bigger problem, sustainable investments and the issuance of green bonds have increased. In this article, we study the announcement returns of green bond issuers based on the environmental firm effort and the environmental appearance of the sector to see how the European market reacts to different types of issuers. By doing an event study based on both a one-factor analysis (CAPM) and a three-factor analysis (FF3) we show that investors are rewarding firms based on the sustainability of the issuer’s sector rather than the individual firm effort, with an average CAR from CAPM of 1,87% (p-value 0,06) for all issuers, and 2,91% (p-value 0,05) for issuers in green sectors, during the 21-day event window. The three-factor analysis shows an average CAR of 3,08% (p-value 0,02) for all issuers, 3,26% (p-value 0,03) for issuers in the green sector and 2,91% (p-value 0,04) for issuers in the brown sector, on the same 21-day event window. One possible explanation for the result is the fear of greenwashing, where firms in a brown sector should be more likely to greenwash. This implies that firms who are acting green in a brown sector are rewarded less, which could limit green investments in brown sectors.