Corporate Green Bonds and the Cost of Capital

This study examines the effect of issuing the first green bonds on the corporate overall cost of capital. Using a difference-in-differences approach, we compare 191 green with conventional bonds that were issued in 19 countries between 2013q2 and 2020q4. We find that issuing a green rather than a conventional bond lowers the weighted average cost of capital (WACC) by 25 basis points (bps). In a robustness check, we estimate a nearly identical 24 basis point effect using a synthetic control method (SCM) to compare 16 green with 33 control companies in the energy and utility sectors that issued bonds between 2016q4 and 2020q3. The chapter provides empirical evidence that obtaining a “green bond” designation lowers the cost of capital, along with the required rate of return from the investors and the perceived riskiness of a firm’s debt. The results are consistent with the view that climate change poses systemic risk to bond investors.