思维领导

Demand for green bonds has grown in leaps and bounds since the market was launched in 2007. Beyond the important environmental projects they fund, they also bring benefits to shareholders.

As the world becomes increasingly concerned by the huge environmental challenges created by climate change and global warming, green bonds have seen their popularity surge. A total of US$580 billion in green bonds were sold up to the year 2018, and at least another US$170 billion more are expected to be sold this year, according to Bloomberg New Energy Finance.

Green bonds are bonds that are specifically aimed at funding new or existing environmental and climate-friendly projects. These projects may include investing in renewable energy projects such as solar power, funding waste management solutions or providing clean water supplies, for example.

The green bond market started in 2007 when the European Investment Bank and the World Bank issued the first triple-A rated bonds. Since then, the market has taken off. Growth has come not only in the sums being invested, but in the geographical breadth of green bond markets. The biggest bond issuers are in the US, China and France, but 2017 saw new issues from Argentina, Chile, Lithuania and Nigeria, among others. Hong Kong is now strongly represented in this market. In May this year, the Hong Kong government issued its first sovereign green bond as part of its HK$100 billion green bond scheme, attracting orders exceeding US$4 billion, which was more than four times the issuance size. Elsewhere in Asia, in 2017 Malaysia launched the world’s first “green Sukuk” – an Islamic green bond to fund climate-resilient growth.

Why green bonds?

The need for funds to combat climate change has been estimated as running into trillions of dollars, more than any government could invest. Green bonds provide a way for other entities to get involved by issuing bonds that are destined to finance environmental projects. The biggest public green bond issuers are financial institutions and corporations whose bonds have different uses: corporate green bonds are used to finance the issuer’s own projects while FIs’ bonds are used to lend and invest in other firms’ projects.

In their study entitled “Do shareholders benefit from green bonds?” which was published in the Journal of Corporate Finance in December 2018, authors Dragon Yongjun TANG and Yupu ZHANG of the FBE note that there is no universal definition of green bonds. Tang and Zhang define green bonds as “fixed income securities issued by capital raising entities to fund their environmentally friendly projects, such as renewable energy, sustainable water management, pollution prevention, climate change adaptation and so on.” In general, green bonds are intended to have a positive environmental impact, such as reducing emissions of carbon dioxide and cutting pollution.

The process of issuing green bonds can be cumbersome. To ensure the environmentally friendly credentials of the project that the bond will finance and enhance the appeal of their bonds to investors, issuers typically choose to get their green bonds certified by an external examiner. Issuers also need to track progress and provide investors with annual reports on how the proceeds are being spent. All of these processes entail considerable additional costs as well as an investment in time. The questions is whether this extra effort and expense is worth it for the shareholders.  That is the main question that Tang and Zhang set out to answer in their study. It turns out that green bonds bring several benefits to shareholders.

Identifying sources of benefits for shareholders

After building a comprehensive dataset of international corporate green bond data, Tang and Zhang were able to establish that stock prices of issuers respond positively to announcements of green bond issuance. Stock prices increased significantly at the same time as green bonds were announced. The increases were more pronounced for corporate bonds than for financial institutions, and were stronger for first-time issuers compared to repeat issuers. This is a clear benefit to shareholders in that issuing green bonds can improve firm value in the short run.

The authors though were keen to dig deeper and to find out what lay behind the positive reaction to news that a firm was about to launch a green bond.  They identified three potential reasons for the improved stock prices and tested them all.

Financing cost

“Green bonds normally face oversubscription,” say the authors. “From the stakeholder theory point of view, green bonds can be regarded as internalising environmental externalities and catering to the appetite of a certain type of investor, especially investors with a green mandate.”

Therefore, interest in buying the bonds is likely to rise from institutional investors who are seeking to increase their ESG performances by investing in green products. Their interest can push up the bond price, which will result in lower debt costs for the issuers. This cheaper debt for the issuers is an outcome that would improve the firm’s appeal and performance on the stock market.

Investor attention

The positive stock market reaction on announcement of a green bond could be due to an increase in the firm’s visibility. Using the ‘green’ label indicates that a firm’s green projects have been verified by an independent party. This encourages media interest and coverage, and when a firm announces a green bond issuance, media coverage is much higher compared with ordinary bond issuance. Green bond issuance increases attention on a firm, which in turn leads to more consideration of investment from investors and higher demand for the firm’s shares.

“When firms label their green bonds, increasing media exposure can attract investors’ attention and the invisibility of the issuing firms can potentially increase, leading to more demand for their shares, and a larger investor base,” explain the authors.

Firm’s fundamentals

When a firm launches a green bond, it is seen as a sign of the firm’s long-term commitment to sustainable development. This strengthens the firm’s appeal to investors by showing it to have strong fundamentals which will help it to survive over the long term. “Under normal circumstances, when firms issue straight corporate bonds, they will not disclose information as much as they do when issuing green bonds,” explain the authors. “As a result investors will benefit from additional information that the green bond issuer discloses when issuing a green bond, so that the stock market will react positively to the announcement.”

The authors suggested that green bond issuance would attract the attention of more investors and expand the firm’s investor base. However, they found little evidence suggesting a premium for green bonds, which implied that the positive stock market reaction they had identified could not be explained by the potentially lower cost of debt alone.

Benefits for shareholders

“Overall, our findings suggest that existing shareholders derive net benefits from green bond issuance,” say Tang and Zhang.

The results of their work showed that firms who issue green bonds see increased investor attention and an expanded investor base, particularly from institutional investors. The authors found that when a firm issues green bonds, institutional investors are almost eight per cent more likely to invest in the firm compared to firms that did not issue green bonds. Institutional investors are largely made up of pension funds, mutual funds and insurance companies and other huge entities that are usually investing funds in large amounts and on behalf of others.

The authors also found evidence of increased media attention and more internet searches about a firm once it announced that a green bond would be issued, supporting the idea that investor attention accounts for much of the gains.

Issuing green bonds brings several benefits to shareholders. Notice of the issuance of green bonds by firms leads to increased visibility of the firm both in the media and online, which can help to expand the investor base.

Announcement of issuance also attracts the attention of impact investors who are increasingly seeking ESG options to meet the demands of their clients.

These results are in line with other studies showing that firms benefit from higher ESG because it is seen as reducing downside risk. Additionally, the results show that institutional investors, who typically make longer term investments, look out for and value a firm’s ESG activities.

Contributing reporter: Liana CAFOLLA

Source: Dragon Yongjun TANG, Yupu ZHANG (2018).  Do shareholders benefit from green bonds?  Journal of Corporate Finance.