OVER the last five years, green bond issuance has been booming. Although conceived in 2007, the market really took off in 2014 when US$37 billion was issued globally. This grew rapidly to reach US$160 billion in 2017, with that record-setting number expected to be beaten again this year with US$250 billion.
Green bonds were created to fund projects that have positive environmental and climate benefits.
They are intended to encourage sustainability and, more specifically, finance projects aimed at issues such as energy efficiency, pollution prevention, sustainable agriculture, clean transportation, sustainable water management and the cultivation of environmentally friendly technologies.
While the market has been booming, with big names like Apple and Unilever issuing green bonds in recent years, there’s been little research done on whether they’re effective. That is, until now.
Caroline Flammer, Associate Professor of Strategy and Innovation at the Boston University Questrom School of Business, analysed 217 corporate green bonds issued by public companies globally from Jan 2013 to Dec 2017.
The results were overwhelmingly positive, both environmentally and for a company’s bottom line.
Bank Windhoek issues the first Green Bond. As the only 100% locally owned commercial bank in Namibia, we share the responsibility to protect our country for future generations. #ForaBetterNamibia Read more: https://t.co/diMDkAdlND pic.twitter.com/TSAwBhSvqV
— Bank Windhoek (@BankWindhoek) December 6, 2018
Stock market goes up
Flammer’s research found the issuer company’s stock price increases when a green bond offering is announced, suggesting investors believe the bonds will improve shareholder value.
The study showed companies could expect an average additional return of 0.67 percent on normal stock market increases due to their issuance of green bonds. If the green bond has been certified by an independent third party, such as Ernst & Young, this stock price increase doubled.
The third-party assessment ensures the proceeds of the bonds are being used on projects that genuinely have material environmental benefit. The high cost of achieving certification shows a company is truly committed to the scheme, this is then reflected in the positive stock reactions.
Bottom line goes up
When compared to companies issuing regular bonds, those issuing green bonds saw an improvement in operating performance of 0.6 percent hike in return on assets (ROA).
Long-term value increase of 2.4 percent was also found to be associated with green bond offerings.
Flammer found it generally takes at least two years for companies to enjoy this higher operating profit as investments in green projects take time to pay off. But figures show they are more than worth it in the long run.
— Glen Gostlow (@glengostlow) December 7, 2018
Environmental performance improves
A company’s overall environmental performance was found to improve following the issuance of green bonds.
Using the Thomson Reuters’ ASSET 4 scale – a metric providing environmental, social and governance information of a company based on over 250 key performance indicators – Flammer found companies’ environmental scores rose an average of 6.1 percentage points.
Green bond issuers were found to reduce their carbon dioxide emissions by 17 tonnes per US$1 million of assets.
Innovation also takes a greener direction with green bond companies more likely to incorporate environmental sustainability in their future advancements.
While governments struggle to grapple with the enormity of climate change and drag their feet on any effective policy, green bonds hold real promise on an issue that so badly needs action.