We examine the pricing difference of Green Bonds (GB) and conventional bonds (CBs) in capital markets worldwide. Credit spread is used to observe whether investors would like to pay a premium for GBs over CBs. This study uses panel data regression with hybrid model to analyse daily observations over the period 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 that 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 (BPS), compared with a comparable corporate bond issue. We find that the green label provides issuers 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 stakeholders driving the GB market to scale up the market to finance the required level of global green investment needs. We stress an urgent need to support the growth of the GB market to achieve sustainable development through mitigating climate change challenges. Abbreviation GB: Green Bond; CB: Conventional Bond; YS: Yield Spread; BPS: Basis Points; OAS: Option-Adjusted Spread; PCSE: Panels Corrected Standard Errors; CPI: Consumer Price Index; GBPs: Green Bond Principles; CBS: Climate Bond Standard.
This study was motivated by the urgent requirement to scale up the global green bond (GB) market to meet the trillion-dollar financial requirement of environmental resilience projects worldwide, and by the absence of prior scientific investigations to determine solutions to the GB market’s problems from different perspectives. Three empirical studies were conducted to provide a holistic view of the GB market. The first study investigated the perception gaps of different stakeholders in the GB market in terms of assessing the ‘greenness’ of projects funded through GBs, investors’ expectations of GB investments, and the factors hindering the growth of the GB market. A qualitative method was employed with document review, followed by interviews, a questionnaire survey and peer debriefing. The study found that both the demand and supply sides of the GB market are inadequate to meet the world’s green investment requirements. The main obstacles hindering the market growth are fear for greenwashing, definitions that lack clarity, the absence of large-scale issues, and the high costs associated with complex reporting processes and third-party certifications. The second study assessed the influence of GB principles on investor demand for GBs, using global GBs issued for the period 2007 to 2016. Bid–ask spread and yield spread were used to measure the investor demand. The results indicated a significant positive relationship between the degree of compliance and investor demand. The third study compared the credit spreads of corporate GBs and conventional bonds, measured by option-adjusted spread daily data for the period 2016 to 2017 worldwide. Hybrid method of panel data regression was employed to analyse the data, and found that GBs are traded at a premium in the world market, compared with conventional bonds. This thesis suggests several policy implications based on the findings of these studies to scale up the GB market as a new source of financing.