Keen for Green - A Study of Pricing in the Secondary Green Bond Market

Abstract: The emerging green bond market is a novel research area with only a few studies being published in recent years. The increase in interest from issuers, investors, and academia shows the clear need for further investigation of the pricing dynamics affecting the green bond market. This study finds its theoretical foundation in the capital asset pricing model (CAPM), aiming to establish whether investor preferences toward nonpecuniary factors such as sustainability bring investor utility, challenging the original CAPM assumptions. If so, investors would demand lower financial returns as they find utility in the fact that green bonds cater to their sustainability preferences. We study the secondary green bond markets between 2014 and 2018 to investigate if there exists a negative yield premium when comparing a sample of green bonds with their non-green counterparts. The quantitative methodological approach includes OLS and issuer fixed effect regressions. Our differentiated sampling process allows us to construct the largest sample of green bonds compliant with the Green Bond Principles to date. We conclude that there exists a negative green bond premium of -4 to -5 basis points. Our findings also indicate that the green bond premium is not stable over time, with significantly negative yield premiums in 2017 and 2018. Our results remain robust after additional controls for potential liquidity differences, indicating strength in the statistical inferences.