A look at the importance of certifying “green” credentials for corporate debt

Green bonds (3) are a relatively new type of bond with the distinguishing feature that proceeds are used to finance environmentally friendly projects, primarily related to climate change mitigation and adaptation initiatives.

The first corporate green bond in the world was issued in 2013 by EDF to fund a technologically advanced climate-friendly project. Since then, public attention to environmental, social, and governance (ESG) issues has reached unprecedented levels and sustainability related bond issuances have skyrocketed reaching $4trillion globally in 2024 according to the World Bank (4).

The importance of “shade of greens” scores

With the increase in the size of the green bonds market, the complexity of such financial instruments has also risen. For example, a growing number of bonds is classified according to the expected environmental impact of the financed projects; the degree of greenness of the bond is then labelled using “shades of green” scores: the stronger the impact, the “darker” the green bond. Usually, such greenness assessment of the bond proceeds is provided by external independent agencies.

In a recent study (1) we investigated the informative content of Second Party Opinions (SPOs) issued by external reviewers by putting together the largest global sample of corporate green bonds to date.

We first explored whether the shade of green matters in the market pricing of bonds depending on the presence of a credit rating. We find that for bonds which have a credit rating the market does not price the shade of traded green bonds there is no tangible difference in the price of bonds with different shades of green. However, when the bond issues are not rated - and, therefore, the information asymmetry is higher - SPOs appear to provide investors with further information that is relevant to the market. In absence of ratings,  the market appears to acknowledge that the shades of green matter.

The impact of regulations

We also explored whether the market relevance of the shades of green changes as a response to stricter green investment regulations. We specifically study the greenium response to the adoption of the “EU Taxonomy” in June 2021, a classification system for sustainable economic activities developed by the European Union with far reaching implications for the global responsible investment industry.

Our findings show that stricter regulation of green investments fosters the demand for the bonds with the best climate credentials as recorded by SPOs.

Dark-green bonds and the special case of UNPRI investors

Finally, we investigate whether the ownership of dark-green bonds (5) differs from that of otherwise similar green or brown bonds across different investors. We are specifically interested in the role of investors who have signed onto UNPRI, because such investors commit to integrate climate concerns in their investment decisions and the UNPRI is the largest ESG initiative in the asset-management industry to date.

We find that UNPRI investors own 16% of all green bonds compared to 13.3% of conventional bonds. The data show that UNPRI investors take larger stake of green bonds, and the ownership of green bonds is more concentrated amongst UNPRI investors than amongst other investors.

When we analyze the data within green bonds, we find that UNPRI investors hold substantially more green bonds (19.5%) than other investors (9.46%) when the bonds do not have a credit rating. On the contrary, both types of investors hold about the same stake (10%) of green bonds with credit rating. Therefore, the decoupling in ownership between UNPRI investors and other owners seem to happen particularly when green bonds are not financially rated.

We observe that across the three shades of greenness there is a clear preference of UNPRI investors for darker-green bonds, but only when the bonds are not financially rated. For example, UNPRI investors hold on average 10.24 percentage points larger stake of dark-green bonds, compared to other (non-UNPRI) investors. Interestingly, there is no statistically significant difference between the ownership of UNPRI and other investors for light-green bonds, irrespective of the existence of a credit rating for these bonds.

Our analysis reveals responsible investors’ strong preference for dark-green bonds, while the lighter-green bonds appear to be treated like non-green bonds as far as ownership is concerned. This preference appears when the green bonds are not financially rated.

Numerous policy implications

In the past decade, green bonds have become increasingly appealing as an asset class to investors. Our findings have several policy implications for this growing segment of the market. Independent external reviews can help reduce the information asymmetry between green bond issuers and investors; thus, better regulatory standards and frameworks should be encouraged.

In particular, the shade-of-green approach could offer a more granular assessment of the environmental quality of the projects financed with green fixed-income securities, particularly so for issues lacking a credit rating. Policymakers and financial regulators should support the homogenization, comparability, and independence of the assessment criteria adopted by green bonds’ external reviewers.

References

(1) M. Ghitti, G. Gianfrate, F. Lopez-de-Silanes, M. Spinelli, What’s in a shade? The market relevance of green bonds’ external reviews, The British Accounting Review, 2023, https://doi.org/10.1016/j.bar.2023.101271

(2) Measuring the Greenness of Green Bonds (Jan. 2024), Gianfranco Gianfrate, EDHEC Risk Climate Impact Institute - https://climateimpact.edhec.edu/measuring-greenness-green-bonds

(3) What are green bonds and why is this market growing so fast? (Nov. 2024), World Economic Forum - https://www.weforum.org/stories/2024/11/what-are-green-bonds-climate-change/

(4) Labeled Bonds (Nov. 2024), The World Bank - https://thedocs.worldbank.org/en/doc/70cdb690f0138e2b485fcedd7bc8fd71-0340012024/original/Labeled-bond-market-quarterly-newsletter-Q3-2024.pdf

(5) “Dark green” equity funds could go “full green” with very limited impact on their risk profile (May 2024), Aurore Porteu de la Morandière, Benoît Vaucher, Vincent Bouchet - Scientific Portfolio (and EDHEC Venture) - https://www.edhec.edu/en/research-and-faculty/edhec-vox/equity-investors-dark-green-funds-full-green-very-limited-impact-risks

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