A comparative analysis of green bonds and conventional bonds

Abstract

This thesis analyses the presence or absence of green bond premium, which is well-known as the greenium. Known to be relatively innovative investment instruments, green bonds have been minimally studied at present. The differing component distinguishing a green bond from a conventional bond consists of its utilisation of proceed in projects contributing towards environmental targets. The comparison of green bond yields with those of non-green bonds, follows prior literature through matching green bond samples to those of non-green bonds exhibiting similar traits, as related to rating and time to maturity. A sample time frame, from 1st January 2018 to 31st December 2021, is analysed as related to green and comparable, conventional bonds. 37 green bonds are analysed, whilst a control group of conventional bonds is identified from a sample containing 29 conventional bonds. Then five regression models were evaluated. Overall, the models consistently suggest that green bonds offer lower yields in line with previous literature. Having said that, the respective coefficients in the regression models were deemed to be of no statistical significance. With reference to the other variables included in the models, i.e., time to maturity and credit rating, their signs were in line with the expectations. This translates into longer time to maturities bonds and bonds of lower credit worthiness offering higher yields. However, this was not statistically significant on a consistent basis. Thus, the findings offered by this thesis suggests that Greenium does exist. This suggest that investors are ready to pay more for green bonds for the pro-environment preference. Another suggestion might be that the lower underlying risks of green bonds can potentially explain the lower yields produced.