IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v95y2021ics0140988321000189.html
   My bibliography  Save this article

Sustainability premium in energy bonds

Author

Listed:
  • Díaz, Antonio
  • Escribano, Ana

Abstract

We investigate the extent to which belonging to a sustainable index leads to lower financing costs for companies in the energy industry. From an extensive sample that includes all energy bonds traded on the US corporate bond market between 2005 and 2014, we examine the differences between the yield spreads on bonds issued by green and non-green energy companies, based on the inclusion of issuers in the Dow Jones Sustainability Index. The yield spreads are computed from synthetic governmental bonds obtained discounting original cash flows from the zero-coupon yield curve. Controlling by bond fundamentals and market conditions, the sustainability premium averages 66 b.p. in yield spread terms. This premium depends on the credit quality of the issuer, ranging from 23 b.p. for investment grade bonds to 261 b.p. for junk bonds. This price premium that investors are willing to pay for the green energy company bonds entails a lower cost of debt for these companies.

Suggested Citation

  • Díaz, Antonio & Escribano, Ana, 2021. "Sustainability premium in energy bonds," Energy Economics, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:eneeco:v:95:y:2021:i:c:s0140988321000189
    DOI: 10.1016/j.eneco.2021.105113
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988321000189
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2021.105113?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thuy Thi Thu Truong & Jungmu Kim, 2019. "Do Corporate Social Responsibility Activities Reduce Credit Risk? Short and Long-Term Perspectives," Sustainability, MDPI, vol. 11(24), pages 1-16, December.
    2. N. Kreander & R.H. Gray & D.M. Power & C.D. Sinclair, 2005. "Evaluating the Performance of Ethical and Non‐ethical Funds: A Matched Pair Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7‐8), pages 1465-1493, September.
    3. Lawrence Fisher, 1959. "Determinants of Risk Premiums on Corporate Bonds," Journal of Political Economy, University of Chicago Press, vol. 67(3), pages 217-217.
    4. Paul Lanoie, 2008. "When And Why Does It Pay To Be Green?," CIRANO Papers 2008n-02a, CIRANO.
    5. I. Girerd-Potin & S. Jimenez-Garces & Pascal Louvet, 2014. "Which Dimensions of Social Responsibility Concern Financial Investors?," Post-Print halshs-01333409, HAL.
    6. Heinkel, Robert & Kraus, Alan & Zechner, Josef, 2001. "The Effect of Green Investment on Corporate Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(4), pages 431-449, December.
    7. Gurkaynak, Refet S. & Sack, Brian & Wright, Jonathan H., 2007. "The U.S. Treasury yield curve: 1961 to the present," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2291-2304, November.
    8. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    9. Ioannis Oikonomou & Chris Brooks & Stephen Pavelin, 2014. "The Effects of Corporate Social Performance on the Cost of Corporate Debt and Credit Ratings," The Financial Review, Eastern Finance Association, vol. 49(1), pages 49-75, February.
    10. Pornsit Jiraporn & Napatsorn Jiraporn & Adisak Boeprasert & Kiyoung Chang, 2014. "Does Corporate Social Responsibility (CSR) Improve Credit Ratings? Evidence from Geographic Identification," Financial Management, Financial Management Association International, vol. 43(3), pages 505-531, September.
    11. Kangtao Ye & Ran Zhang, 2011. "Do Lenders Value Corporate Social Responsibility? Evidence from China," Journal of Business Ethics, Springer, vol. 104(2), pages 197-206, December.
    12. Renneboog, Luc & Ter Horst, Jenke & Zhang, Chendi, 2008. "Socially responsible investments: Institutional aspects, performance, and investor behavior," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1723-1742, September.
    13. Fama, Eugene F. & French, Kenneth R., 2007. "Disagreement, tastes, and asset prices," Journal of Financial Economics, Elsevier, vol. 83(3), pages 667-689, March.
    14. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2388-2406, September.
    15. Hachenberg, B. & Schiereck, D., 2018. "Are green bonds priced differently from conventional bonds?," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 109709, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    16. Masini, Andrea & Menichetti, Emanuela, 2012. "The impact of behavioural factors in the renewable energy investment decision making process: Conceptual framework and empirical findings," Energy Policy, Elsevier, vol. 40(C), pages 28-38.
    17. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    18. Friewald, Nils & Jankowitsch, Rainer & Subrahmanyam, Marti G., 2012. "Illiquidity or credit deterioration: A study of liquidity in the US corporate bond market during financial crises," Journal of Financial Economics, Elsevier, vol. 105(1), pages 18-36.
    19. Bauer, Rob & Koedijk, Kees & Otten, Roger, 2005. "International evidence on ethical mutual fund performance and investment style," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1751-1767, July.
    20. W. Braddock Hickman, 1958. "Introduction and Summary of Findings to "Corporate Bond Quality and Investor Experience"," NBER Chapters, in: Corporate Bond Quality and Investor Experience, pages 3-27, National Bureau of Economic Research, Inc.
    21. La Rosa, Fabio & Liberatore, Giovanni & Mazzi, Francesco & Terzani, Simone, 2018. "The impact of corporate social performance on the cost of debt and access to debt financing for listed European non-financial firms," European Management Journal, Elsevier, vol. 36(4), pages 519-529.
    22. N. Kreander & R.H. Gray & D.M. Power & C.D. Sinclair, 2005. "Evaluating the Performance of Ethical and Non-ethical Funds: A Matched Pair Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7-8), pages 1465-1493.
    23. Najah Attig & Sadok El Ghoul & Omrane Guedhami & Jungwon Suh, 2013. "Corporate Social Responsibility and Credit Ratings," Journal of Business Ethics, Springer, vol. 117(4), pages 679-694, November.
    24. Dockner, Engelbert J. & Kucsera, Dénes & Rammerstorfer, Margarethe, 2013. "Investment, firm value, and risk for a system operator balancing energy grids," Energy Economics, Elsevier, vol. 37(C), pages 182-192.
    25. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
    26. Andrea Masini & E. Menichetti, 2012. "The impact of behavioural factors in the renewable energy investment decision making process: Conceptual framework and empirical findings," Post-Print hal-00651706, HAL.
    27. Amihud, Yakov & Mendelson, Haim, 1991. "Liquidity, Maturity, and the Yields on U.S. Treasury Securities," Journal of Finance, American Finance Association, vol. 46(4), pages 1411-1425, September.
    28. Klaus-Michael Menz, 2010. "Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market? A Critical Note," Journal of Business Ethics, Springer, vol. 96(1), pages 117-134, September.
    29. Díaz, Antonio & Escribano, Ana, 2017. "Liquidity measures throughout the lifetime of the U.S. Treasury bond," Journal of Financial Markets, Elsevier, vol. 33(C), pages 42-74.
    30. Chang, Kai & Zeng, Yonghong & Wang, Weihong & Wu, Xin, 2019. "The effects of credit policy and financial constraints on tangible and research & development investment: Firm-level evidence from China's renewable energy industry," Energy Policy, Elsevier, vol. 130(C), pages 438-447.
    31. Sun, Wenbin & Cui, Kexiu, 2014. "Linking corporate social responsibility to firm default risk," European Management Journal, Elsevier, vol. 32(2), pages 275-287.
    32. Olivier David Zerbib, 2019. "The effect of pro-environmental preferences on bond prices: Evidence from green bonds," Post-Print halshs-02008641, HAL.
    33. Niesten, Eva & Jolink, Albert & Chappin, Maryse, 2018. "Investments in the Dutch onshore wind energy industry: A review of investor profiles and the impact of renewable energy subsidies," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P2), pages 2519-2525.
    34. Darren D. Lee & Robert W. Faff, 2009. "Corporate Sustainability Performance and Idiosyncratic Risk: A Global Perspective," The Financial Review, Eastern Finance Association, vol. 44(2), pages 213-237, May.
    35. Zerbib, Olivier David, 2019. "The effect of pro-environmental preferences on bond prices: Evidence from green bonds," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 39-60.
    36. Antonio Díaz & Eliseo Navarro, 2002. "Yield Spread and Term to Maturity: Default vs. Liquidity," European Financial Management, European Financial Management Association, vol. 8(4), pages 449-477, December.
    37. Bessembinder, Hendrik & Maxwell, William & Venkataraman, Kumar, 2006. "Market transparency, liquidity externalities, and institutional trading costs in corporate bonds," Journal of Financial Economics, Elsevier, vol. 82(2), pages 251-288, November.
    38. Stellner, Christoph & Klein, Christian & Zwergel, Bernhard, 2015. "Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 538-549.
    39. Mark P. Sharfman & Chitru S. Fernando, 2008. "Environmental risk management and the cost of capital," Strategic Management Journal, Wiley Blackwell, vol. 29(6), pages 569-592, June.
    40. Galema, Rients & Plantinga, Auke & Scholtens, Bert, 2008. "The stocks at stake: Return and risk in socially responsible investment," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2646-2654, December.
    41. Sudheer Chava, 2014. "Environmental Externalities and Cost of Capital," Management Science, INFORMS, vol. 60(9), pages 2223-2247, September.
    42. W. Braddock Hickman, 1958. "Corporate Bond Quality and Investor Experience," NBER Books, National Bureau of Economic Research, Inc, number hick58-1.
    43. Ghouma, Hatem & Ben-Nasr, Hamdi & Yan, Ruiqian, 2018. "Corporate governance and cost of debt financing: Empirical evidence from Canada," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 138-148.
    44. Klock, Mark S. & Mansi, Sattar A. & Maxwell, William F., 2005. "Does Corporate Governance Matter to Bondholders?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(4), pages 693-719, December.
    45. Ramon E. Johnson, 1967. "Term Structures Of Corporate Bond Yields As A Function Of Risk Of Default," Journal of Finance, American Finance Association, vol. 22(2), pages 313-345, May.
    46. Isabelle Girerd-Potin & Sonia Jimenez-Garcès & Pascal Louvet, 2014. "Which Dimensions of Social Responsibility Concern Financial Investors?," Journal of Business Ethics, Springer, vol. 121(4), pages 559-576, June.
    47. Goss, Allen & Roberts, Gordon S., 2011. "The impact of corporate social responsibility on the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1794-1810, July.
    48. Helwege, Jean & Huang, Jing-Zhi & Wang, Yuan, 2014. "Liquidity effects in corporate bond spreads," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 105-116.
    49. I. Girerd-Potin & S. Jimenez-Garces & P. Louvet, 2014. "Which Dimensions of Social Responsibility Concern Financial Investors?," Post-Print halshs-01026389, HAL.
    50. Ng, Anthony C. & Rezaee, Zabihollah, 2015. "Business sustainability performance and cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 128-149.
    51. Gonenc, Halit & Scholtens, Bert, 2017. "Environmental and Financial Performance of Fossil Fuel Firms: A Closer Inspection of their Interaction," Ecological Economics, Elsevier, vol. 132(C), pages 307-328.
    52. I. Girerd-Potin & S. Jimenez-Garces & Pascal Louvet, 2014. "Which Dimensions of Social Responsibility Concern Financial Investors?," Post-Print halshs-01337706, HAL.
    53. Antionio Diaz & Frank Skinner, 2001. "Estimating Corporate Yield Curves," ICMA Centre Discussion Papers in Finance icma-dp2001-01, Henley Business School, University of Reading.
    54. W. Braddock Hickman, 1958. "Index to "Corporate Bond Quality and Investor Experience"," NBER Chapters, in: Corporate Bond Quality and Investor Experience, pages 531-536, National Bureau of Economic Research, Inc.
    55. Britta Hachenberg & Dirk Schiereck, 2018. "Are green bonds priced differently from conventional bonds?," Journal of Asset Management, Palgrave Macmillan, vol. 19(6), pages 371-383, October.
    56. repec:bla:jfinan:v:44:y:1989:i:5:p:1351-60 is not listed on IDEAS
    57. Janusz Brzeszczyński & Binam Ghimire & Tooraj Jamasb & Graham McIntosh, 2019. "Socially Responsible Investment and Market Performance: The Case of Energy and Resource Companies," The Energy Journal, , vol. 40(5), pages 17-72, September.
    58. Noblet, Caroline L. & Teisl, Mario F. & Evans, Keith & Anderson, Mark W. & McCoy, Shannon & Cervone, Edmund, 2015. "Public preferences for investments in renewable energy production and energy efficiency," Energy Policy, Elsevier, vol. 87(C), pages 177-186.
    59. Ng, Alex & Zheng, Di, 2018. "Let's agree to disagree! On payoffs and green tastes in green energy investments," Energy Economics, Elsevier, vol. 69(C), pages 155-169.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guo, Dong & Zhou, Peng, 2021. "Green bonds as hedging assets before and after COVID: A comparative study between the US and China," Energy Economics, Elsevier, vol. 104(C).
    2. Ferriani, Fabrizio, 2023. "Issuing bonds during the Covid-19 pandemic: Was there an ESG premium?," International Review of Financial Analysis, Elsevier, vol. 88(C).
    3. Amit Kumar Singh & Yifang Zhang & Anu, 2023. "Understanding the Evolution of Environment, Social and Governance Research: Novel Implications From Bibliometric and Network Analysis," Evaluation Review, , vol. 47(2), pages 350-386, April.
    4. Taghizadeh-Hesary, Farhad & Yoshino, Naoyuki & Rasoulinezhad, Ehsan & Rimaud, Cedric, 2021. "Power purchase agreements with incremental tariffs in local currency: An innovative green finance tool," Global Finance Journal, Elsevier, vol. 50(C).
    5. Yulia V. Vymyatnina & Aleksandr A. Chernykh, 2024. "Green bonds in the Russian market: Assessing environmental influence on returns," Russian Journal of Economics, ARPHA Platform, vol. 10(3), pages 211-228, October.
    6. Stefano Nobili & Mattia Persico & Rosario Romeo, 2024. "How Important Are Esg Factors For Banks’ Cost Of Debt? An Empirical Investigation," Temi di discussione (Economic working papers) 52, Bank of Italy, Economic Research and International Relations Area.
    7. Sharma, Gagan Deep & Shahbaz, Muhammad & Singh, Sanjeet & Chopra, Ritika & Cifuentes-Faura, Javier, 2023. "Investigating the nexus between green economy, sustainability, bitcoin and oil prices: Contextual evidence from the United States," Resources Policy, Elsevier, vol. 80(C).
    8. Tang, Ying & Wang, Biliang & Pan, Ningning & Li, Zhiyong, 2023. "The impact of environmental information disclosure on the cost of green bond: Evidence from China," Energy Economics, Elsevier, vol. 126(C).
    9. Sun, Jianhua & Hou, Shaobo & Deng, Yuxia & Li, Huaicheng, 2024. "New media environment, green technological innovation and corporate productivity: Evidence from listed companies in China," Energy Economics, Elsevier, vol. 131(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zerbib, Olivier David, 2019. "The effect of pro-environmental preferences on bond prices: Evidence from green bonds," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 39-60.
    2. Lutfi Abdul Razak & Mansor H. Ibrahim & Adam Ng, 2020. "Which Sustainability Dimensions Affect Credit Risk? Evidence from Corporate and Country-Level Measures," JRFM, MDPI, vol. 13(12), pages 1-22, December.
    3. Qinghua Wang & Yaning Zhou & Li Luo & Junping Ji, 2019. "Research on the Factors Affecting the Risk Premium of China’s Green Bond Issuance," Sustainability, MDPI, vol. 11(22), pages 1-14, November.
    4. Haifei Wang & Hongjun Wu & Peter Humphreys, 2022. "Chinese Merchant Group Culture, Corporate Social Responsibility, and Cost of Debt: Evidence from Private Listed Firms in China," Sustainability, MDPI, vol. 14(5), pages 1-18, February.
    5. La Rosa, Fabio & Liberatore, Giovanni & Mazzi, Francesco & Terzani, Simone, 2018. "The impact of corporate social performance on the cost of debt and access to debt financing for listed European non-financial firms," European Management Journal, Elsevier, vol. 36(4), pages 519-529.
    6. Maretno A. Harjoto & Andreas G. F. Hoepner & Marcus A. Nilsson, 2022. "Bondholders’ returns and stakeholders’ interests," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1271-1301, November.
    7. Maria Jua Bachelet & Leonardo Becchetti & Stefano Manfredonia, 2019. "The Green Bonds Premium Puzzle: The Role of Issuer Characteristics and Third-Party Verification," Sustainability, MDPI, vol. 11(4), pages 1-22, February.
    8. Gillan, Stuart L. & Koch, Andrew & Starks, Laura T., 2021. "Firms and social responsibility: A review of ESG and CSR research in corporate finance," Journal of Corporate Finance, Elsevier, vol. 66(C).
    9. Alves, Carlos Francisco & Meneses, Lilian Lima, 2024. "ESG scores and debt costs: Exploring indebtedness, agency costs, and financial system impact," International Review of Financial Analysis, Elsevier, vol. 94(C).
    10. Billio, Monica & Costola, Michele & Hristova, Iva & Latino, Carmelo & Pelizzon, Loriana, 2022. "Sustainable finance: A journey toward ESG and climate risk," SAFE Working Paper Series 349, Leibniz Institute for Financial Research SAFE.
    11. Federica Ielasi & Paolo Ceccherini & Pietro Zito, 2020. "Integrating ESG Analysis into Smart Beta Strategies," Sustainability, MDPI, vol. 12(22), pages 1-22, November.
    12. Bai, Min & Ho, Ly, 2022. "Corporate social performance and firm debt levels: Impacts of the covid-19 pandemic and institutional environments," Finance Research Letters, Elsevier, vol. 47(PB).
    13. Henke, Hans-Martin, 2016. "The effect of social screening on bond mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 69-84.
    14. Remmer Sassen & Anne-Kathrin Hinze & Inga Hardeck, 2016. "Impact of ESG factors on firm risk in Europe," Journal of Business Economics, Springer, vol. 86(8), pages 867-904, November.
    15. Meles, Antonio & Salerno, Dario & Sampagnaro, Gabriele & Verdoliva, Vincenzo & Zhang, Jianing, 2023. "The influence of green innovation on default risk: Evidence from Europe," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 692-710.
    16. Fatica, Serena & Panzica, Roberto & Rancan, Michela, 2021. "The pricing of green bonds: Are financial institutions special?," Journal of Financial Stability, Elsevier, vol. 54(C).
    17. Li, WeiWei & Padmanabhan, Prasad & Huang, Chia-Hsing, 2024. "ESG and debt structure: Is the nature of this relationship nonlinear?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    18. Danilo Drago & Concetta Carnevale, 2020. "Do CSR Ratings Affect Loan Spreads? Evidence from European Syndicated Loan Market," Sustainability, MDPI, vol. 12(18), pages 1-30, September.
    19. Qian, Shuitu & Yu, Wenzhe, 2024. "Green finance and environmental, social, and governance performance," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1185-1202.
    20. Wang, Kun Tracy & Kartika, Fiki & Wang, Wanbin Walter & Luo, Guqiang, 2021. "Corporate social responsibility, investor protection, and the cost of equity: Evidence from East Asia," Emerging Markets Review, Elsevier, vol. 47(C).

    More about this item

    Keywords

    Corporate bond; Green energy industry; Yield spread; Dow Jones sustainability index;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:95:y:2021:i:c:s0140988321000189. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.