Do Investors in Green Bond Market Pay a Risk Premium? Global Evidence

Abstract

• We examine the pricing difference of Green Bonds (GB) and conventional bonds (CBs) in capital markets worldwide. Credit spread is used to observe if investors would like to pay a premium over par for GBs or CBs. This study uses panel data regression with hybrid model to analyse daily observations over the period from 2016 to 2017. We employ Option-Adjusted spread (OAS) to measure the credit spreads of bonds while controlling for bond specific, macroeconomic and global factors which influence the spread. With the hybrid model used in the panel data analysis, we were able to capture the fixed effects of variables in a random effect model. We find that GBs are traded at a premium of 63 basis points as against a comparable corporate bond issue. We find that the green label provides issuer an incentive to raise funds through issuing GBs while providing investors an opportunity to diversify their investments returns. Our findings provide several implications to the major players driving green bonds market in order to scale up the market to finance the required level of worldwide green investment needs. We stress an urgent need to support the growth of green bond market to achieve sustainable development through mitigating climate change challenges.