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

Abstract

the green bonding hypothesis: how do green bonds enhance the credibility of environmental commitments? shirley lu∗ harvard business school december 2021 abstract 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. keywords: green bonds, bonding hypothesis, climate change, sustainable finance, corporate social responsibility. jel classification: g12, m14, m41, q56 ∗i greatly appreciate the guidance and support of my dissertation committee: marianne bertrand, hans christensen (chair), christian leuz, and haresh sapra. i thank ray ball, john barrios, philip berger, pingyang gao, joao granja, jody grewal, jeffrey hales, mikael homanen, june huang, maria khrakovsky, …

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