The effect of pro-environmental preferences on bond prices: Evidence from green bonds

• Published in: Journal of banking & finance Vol. 98; pp. 39 - 60
• Main Author: Zerbib, Olivier David
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.01.2019; Elsevier
• Subjects: Economics and Finance; Green bonds; Humanities and Social Sciences; Investment preferences; Liquidity; Socially responsible investing; Q56; Socially responsible investing; G20; C23; Liquidity; Green bonds; G12; G14; Investment preferences
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2018.10.012

•Investors’s pro-environmental preferences have a low impact on bond prices.•Pro-environmental preferences induce a negative yield premium of 2 bps on average.•The main determinants of this premium are the rating and the issuer type.•A-2-bps premium should not be a disincentive to keep on investing in green bonds. We use green bonds as an instrument to identify the effect of non-pecuniary motives, specifically pro-environmental preferences, on bond market prices. We perform a matching method, followed by a two-step regression procedure, to estimate the yield differential between a green bond and a counterfactual conventional bond from July 2013 to December 2017. The results suggest a small negative premium: the yield of a green bond is lower than that of a conventional bond. On average, the premium is -2 basis points for the entire sample and for euro and USD bonds separately. We show that this negative premium is more pronounced for financial and low-rated bonds. The results emphasize the low impact of investors’ pro-environmental preferences on bond prices, which does not represent, at this stage, a disincentive for investors to support the expansion of the green bond market.