Do green bonds offer higher yield than conventional bonds?

Abstract

Sustainable finance and environmental criteria in investment decisions are becoming increasingly important for both investors and issuers. Green Bonds is an emerging financial instrument, and continual research in this area is highly relevant for today’s investors. This master thesis investigates whether green bonds and conventional bond differ in yield. We study the European bond market, more specifically in France, Germany, and the Eurobond market, utilizing a dataset consisting of 13 891 conventional and green bonds over the period of January 1, 2013 – to December 31, 2021. We estimate a model for risk premium (a difference between bond yield and risk-free rate). The results show that there exists a positive premium in all the markets; Germany had the highest premium of +51.3 bps, France had a premium of +35.2 bps and Eurobonds followed with a premium of +28.4 bps. Additionally, the premiums were significantly impacted by the ratings of the bonds. Thus, we conclude that investors demand a higher risk premium for green bonds with lower ratings.