The Green Bonding Hypothesis: How Do Green Bonds Enhance the Credibility of Environmental Commitments?

This paper proposes and provides evidence on a green bonding hypothesis, where green bonds act as a commitment device that subjects firms to institutions holding them accountable to their environmental promises. I find that green-bond issuers face higher climate change risks and opportunities but fewer financial constraints than do traditional-bond issuers. Moreover, consistent with green bonds acting as a commitment device, green-bond issuers increase emissions-target achievements and face more media scrutiny when their target progress decreases after issuing green bonds. In additional analyses, I find that when a municipality issues green bonds, the issuer experiences a reduction in financing costs for both traditional and green bonds issued on the same day, consistent with green bonds being an environmental commitment for an entity, rather than a security-level commitment.