Corporate Green Bonds

A recent development in corporate finance is the use of corporate green bonds, whose proceeds are committed to finance environmental and climate-friendly projects, such as renewable energy, green buildings or resource conservation. Despite being one of the latest innovations in contemporary finance, corporate green bonds are already exceedingly popular, with the corporate sector doubling their issuances of the bonds annually.

In a working paper, Caroline Flammer examines the effectiveness of corporate green bonds for funding sustainable development, along with the implications for firm-level outcomes. A possible pitfall for corporate green bonds is their potential to be used for greenwashing or projecting misleading claims about a company’s environmental commitment. Flammer analyzes the impact of corporate green bonds to weigh their efficacy in promoting green finance, rather than to greenwash.

Flammer found green corporate bonds are effective. Companies invest the proceeds in projects that improve the company’s environmental footprint and ultimately contribute to long-term value creation. Moreover, by issuing green bonds, companies are able to attract an investor clientele that values the long term and the natural environment. Importantly, these results indicate that corporate green bonds have real impact, and hence are not merely a tool of greenwashing.

Flammer also calls for refinement on the characterization of the long-term impacts of corporate green bonds. Questioning the ability of corporate green bonds to reduce or enhance companies’ abilities to issue other bonds, she recommends that future work should explore bond issuance impacts on other debt instruments.