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In this blog, invited columnists share their findings on the positive effects that issuing green bonds has on real estate firms’ reputation.
Infographic 1 – Importance of Green Bond Issuance by Real Estate Firms
To support environmentally beneficial projects, investors are willing to sacrifice part of the return. Regarding green bonds, this means, they accept lower yields (so-called greenium), presumably because they are seeking to support those projects and to have assets with a green label in their portfolios. The existence of a greenium has been confirmed by several studies, ranging from -2 (Zerbib, 2019) to -20 BPS (Löffler et al., 2021).
High needs for funding and the demand from investors are the driving forces for the building sector to be among the largest issuers of green bonds: 11.9 % in the period 2007-2019 (see Infographic 1). In a country like Sweden, green bond issuance now makes up one third of the total bond issuance by real estate firms.
Access to the new and favourable source of financing is also supposed to be facilitated by ESG ratings, as those inform investors which firms are rated by external agencies to be sustainable. However, there remains information asymmetry for green investors regarding green bond issuances and potential “green-washing” ambitions of the issuing firms. A lack of unified public standards and transparent reporting of the issuing firm on its cash flows and use of funds make this information difficult for investors to assess. Some firms might be tempted to use the information “fog” around ESG and market their activities as environmentally friendly in order to leverage new and cheaper financing sources. There is ample anecdotal evidence regarding the practice of green-washing .
In order to convince green investors that a risk of green-washing is not prevalent, firms might seek to build up their green reputation. They become more active on the bond market by issuing more often green bonds, even in several rounds. With frequent green bond issuance, they might try to signal to investors the continuous environmental ambitions of their real estate project portfolio.
The findings of our research highlight that the market rewards this behaviour, and firms, indeed, obtain more favourable financing. Costs of debt and equity capital decrease, and even credit rating improves. This implies that investors perceive repetitive issuing of green bonds as an improvement of the information content regarding a firm’s green projects (see Infographic 2).
As supporting evidence, the results show that firms which issue green bonds for the first time even experience higher financing costs, confirming that it is repetitive green issuance which matters, not green bond issuance per se. We also find that a firm’s ESG rating is improved by frequent green bond issuance as well. The strongest effect is found for the environmental score, while a long track of non-green bond emission improves the governance score.
At each successful issuance and positive follow-up report, investor confidence improves, with effect of lowering the yields. Learning effects make previous green bond issuance increase the chances for next green bond issuance. Once firms issue non-green bond, the transition to green bond is less probable.
We also find evidence that learning how to perform green bond issuance matters. Past bond issuances increase the likelihood of having additional bond issuances, so there is a self-reinforcing effect from bond issuance, too.
Infographic 2 - Reputation Effects of Repetitive Green Bond Issuance
Further References
Baker, M., Bergstresser, D., Serafeim, G., and Wurgler, J. (2018). Financing the response to climate change: The pricing and ownership of US green bonds. Technical report, National Bureau of Economic Research
Löffler, K. U., Petreski, A., and Stephan, A. (2021). Drivers of green bond issuance and
new evidence on the “greenium”. Eurasian Economic Review, 11,1–24
Pommeranz, C. and Steininger, B. I. (2021). What drives the premium for energy-efficient apartments – green awareness or purchasing power? The Journal of Real Estate Finance and Economics
Zerbib, O. D. (2019). The effect of pro-environmental preferences on bond prices: Evidence from green bonds. Journal of Banking & Finance 98, 39–60