IS40640: The market of Green Bonds has seen exponential growth over the recent yearsand was fuelled even more by the COP 21 agreement: Research Methods Thesis, UCD, Ireland

A comparative study on the financial performance of Green bonds and their conventional peers


The market of Green Bonds has seen exponential growth over the recent yearsand was fuelled even more by the COP 21 agreement. However, until today and to the best knowledge of the author, no empirical analysis on the financial return of those instruments has been conducted.

This investigation conducts the first comparative analysis of the financial performance of Green Bonds and their conventional peers. Based on a dataset of 359 Green Bonds and 1291 conventional bonds, the analysis is conducted over the period between 2011 and 2017 and uses an extended Fama-French model in a Fama-Macbeth regression procedure.

Green Bonds do outperform conventional ones over the full sample period but with a low significance. In a subsample period aligned to the “take-off” of the corporate Green Bond issuance, the outperformance can still be confirmed but this time with a high significance. We can observe that the significance is constantly increasing over time.

This can be seen as an important supporting argument for the investment in Green Bonds and the fight against climate change. At the same time it implies that institutional investors are not acting against their fiduciary duties due to investment in those sustainable debt capital products.

The gentleman understands moral duty, the petty person knows about profit”
(Ebrey, 2010) After the recent global financial crisis, the restructuring of national and international financial regulations as well as the still increasing complexity and interconnectedness of financial markets, this 2500 year old Confucian saying is more accurate than ever before.

For a long time, the consideration of ethical values and principles has been
considered a threat to profits in the corporate world. However, these attitudes
changed recently and stakeholders ranging from consumers to investors are not only encouraging but requiring higher levels of transparency and compliance with ethical standards (Glomsrød and Taoyuan, 2016). Environmental, Social and Governance criteria (ESG) are gaining more and more importance when it comes to corporate decision-making and strategy-setting.

The financial sector, heavily criticised for its unethical behaviour in the
wake of the last financial crisis, is increasingly introducing ESG and other sustainability criteria in their investment decision processes. Today, ethics “sells” and unethical behaviour is punished by corporate image losses and shareholder activism.

For a long time, climate change has not been a priority on the ethical investors’
agenda. Lately though, the corporate world is increasingly willing to act on
these matters. Stakeholders around the globe are requiring sustainable and
responsible business models(EY, 2016).

Moving towards a low- or even carbon-neutral world requires the adoption
of green solutions for financial capital. After the United Nations Framework
Convention on Climate Change (UNFCC) and the Kyoto Protocol, the 2015
Paris Agreement is the first treaty that brings together all nations – including
the United States of America – for collective action by an international public
legal agreement that constitutes at the same time a platform for investors to
step up against climate change.

The aim is to reorientate all financial flowsaway from fossil fuels and towards clean forms of development. The COP21 meeting in Paris, with the parties confirming their commitment to keep the

4.1 Bond Dataset

The initial bond dataset consists of a total of 2480 bonds issued between June
2007 and July 2017, a ten-year period. All data was provided by Bloomberg
and converted to U.S. Dollar to ensure comparability that could otherwise be
negatively influenced by changes in exchange and inflation rates. In order to
assure the quality and robustness of the data, the initial sample is further
cleaned and filtered for possible bias drivers as described later in this section.

4.2 Green Bonds

The analysis starts with an initial set of 1062 Green bonds. Since there is still
no universally agreed on definition of a Green bond, the sample of this paper
is compiled using the “Green Bond” tag in the Bloomberg database.

This excludes all so-called Green bonds which are not clearly classified as such by the issuer or have not been provided with the needed supporting information. In general, Bloomberg’s working definition is adopted from the afore-mentioned Green Bonds Principles and reads as follows: “Labelled green bonds are fixed income instruments for which the proceeds will be applied towards projects or activities that promote climate change mitigation or adaptation or other environmental sustainability purposes”(Bloomberg New Energy Finance, 2016).

4.3 Conventional Bonds

The conventional bonds sample is selected from the global bond universe provided by the Bloomberg database. The sample is then filtered for the time
period between 1st July, 2007 to 30th June, 2017. To be coherent with the
Green bonds sample, the paper only includes bonds whose use of proceeds are labelled with the “investment” or “project finance” tag by the data provider.

Also, all non-investment-grade bonds are excluded since for a bond to be compliant with the Green Bond Principles and included in this investigation’s sample it needs to have an investment-grade ranking. This investigation further excludes all bonds issued in a currency other than EUR or USD since these two currencies represent the major part of the global green bond issuance. With a mean maturity of 4.16 and 4.12 years respectively and a mean duration of

4.4 Risk-free Rate

This paper follows the the approach of Fama and French (1993) and considers
the one-month T-Bill rate of the United States as risk-free. This is also coherent with the USD data for the bonds sample. The rates are downloaded on a daily basis from the CRSP data server

4.5 Fama-French Factors

The market, size and value premium, generally considered as the Fama-French
factors are gathered from the CRSP database.

In their research on the cross-section of expected stock returns, Fama and
French (Fama and French, 1993) find that the ratio of book equity to market
equity (BE/ME) captures most of the cross-section of average stock returns.
Therefore, when rationally priced stocks are presumed, systematic differences
in average returns can be traced back to differences in risk (Fama and French,

4.7 Bond Factors

The bond factors are constructed according to Fama and French (1993).
The T ERM factor is defined as “the difference between the monthly longterm government bond return and the one-month Treasury bill rate” (Fama
and French, 1993).

For the long-term government bond return this paper uses the ten-year constant maturity rate provided by the FRED database of the Federal Reserve
Bank of St. Louis on a daily basis.

The risk-free rate is again the one-month T-Bill rate provided by the CRSP.

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IS40640: The market of Green Bonds has seen exponential growth over the recent yearsand was fuelled even more by the COP 21 agreement: Research Methods Thesis, UCD, Ireland
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