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MF
47,10
1486
Received 20 September 2020
Revised 11 February 2021
Accepted 11 April 2021
Managerial Finance
Vol. 47 No. 10, 2021
pp. 1486-1510
© Emerald Publishing Limited
0307-4358
DOI 10.1108/MF-09-2020-0481
The impact of green bonds on
corporate environmental and
financial performance
Kim Ee Yeow and Sin-Huei Ng
Xiamen University Malaysia, Sepang, Malaysia
Abstract
Purpose – As investors’ expectations shift toward corporate sustainability, many corporations have jumped
on the bandwagon of being “green” by issuing green bonds. However, as a recent green financing tool, little
attention has been paid on the value that green bonds actually deliver. This causes the problem of
greenwashing, in which firms pretend to be environmentally responsible when in reality they are not. This
study therefore aims to explore green bonds’ impact on issuers’ corporate environmental and financial
performance.
Design/methodology/approach – The sample is collected from among the green bond and conventional
bond issues between 2015 and 2019 issued by corporations from various countries. Using the propensity score
matching (PSM) and then difference-in-difference (DiD) approaches, two sub-groups (green bond and
conventional bond issuers) were generated for comparison. Changes in environmental and financial
performance over time between the sub-groups are then examined.
Findings – The overall results show that green bonds are effective in improving environmental performance,
but only when they are certified by third parties. Additionally, green bonds do not have an impact on financial
performance. The findings imply that green bonds’ dependency on external certification may be a consequence
of an underdeveloped green bond market, where weak governance still dominates the green bond market.
Because of this, corporations tend to take advantage of green finance’s growing popularity, causing the
greenwashing problem.
Originality/value – Green bonds are an extremely new area of research. Few research studies focus on the
effectiveness of green bonds in impacting corporate financial and environmental performance. Therefore, this
study strives to fill this research gap. It sheds light on the effectiveness of green bonds in supporting the
development of green projects and provides a reference point for decision-making in strengthening
transparency and accountability in environmental disclosure and helps regulating authorities develop tighter
regulatory controls.
Keywords Green bonds, Environmental performance, Financial performance, Green finance, Sustainability,
Certification
Paper type Research paper
1. Introduction
Climate change is the most actively debated topic in the 21st century. Many corporations
have come under fire for contributing immensely to environmental degradation through the
release of toxic chemical emissions. According to the Carbon Majors Report, since 1988, just
100 corporations are the source of more than 70% of Earth’s greenhouse gas (GHG) emissions
(Griffin, 2017). Businesses are the main culprits behind environmental pollution, and the
financial system that funds its operations is equally responsible. The multitrillion-dollar
global capital markets are funding carbon-producing activities that would raise the Earth’s
temperature by over four degrees Celsius, double to what was pledged in the 2015 Paris
Agreement (Partington, 2019).
Fortunately, there has been some shift in the capital markets. The global pool of investors,
who have previously been indifferent about what their investments were supporting, are now
looking to make a difference with their investments. As a result, green financing has been
gaining popularity in the past decade. Green bonds came into existence in 2007, when a team
of Swedish pension funds wanted to invest in projects that fight global warming but did not
know how to obtain funds (World Bank, 2019). They turned to the World Bank, who devised a
new financing method that was impactful on the environment; thus, the world’s first green Green bonds’
bond was issued. The green bond market was originally a sovereign-dominated issuer impact on
market with issuers like the World Bank and European Investment Bank, but the green bond
market has matured into a broader market that now includes corporate bonds, asset-backed
issuers’
securities, project and infrastructure assets and municipal issuers (Kochetygova and performances
Jauhari, 2014).
Since 2014, the volume of global green bond issuance has been growing consistently
year-on-year (Figure 1). 2017 green bond issuances almost doubled the issuance in 2016 1487
while 2019 issuances reached a record high of USD 271 billion. A major force driving the
green bond market growth is the introduction of corporate green bonds issued by private
entities as opposed to national banks; since the private sector’s involvement in 2013,
the market almost tripled in value only one year later in 2014 (Talbot, 2017). Another
important driving force behind the growth in this market is the popular demand for
environmental-friendly financing among institutional investors, who represent the largest
buyers of green bonds (Talbot, 2017). Nevertheless, the green bond market comprises only
less than 1% of cumulative global bond issuances of USD 100 trillion, as the cumulative
green bond issuances are still below USD 1 trillion (International Renewable Energy Agency
[IRENA], 2020).
The primary purpose of green bonds is to raise capital to finance low-carbon projects and
green technologies. But because we live in a world of imperfect markets and imperfect
information, investors lack sufficient information to judge an organization’s commitment
toward the environment. To mitigate the information asymmetry problem, the signaling
theory came into effect, in which the senders of information take costly actions to signal to the
receivers of information of their underlying intentions (Lyon and Montgomery, 2015;
Connelly et al., 2011). When applied in the green finance field, the signaling theory states that
when companies issue green bonds, they credibly signal to the market about their
commitment and intention toward improving their carbon footprint (Lyon and Maxwell,
2006; Lyon and Montgomery, 2015; and Flammer, 2021). Assuming that their intention is
trustworthy, we can then expect the green bond proceeds to be invested in energy-efficient
technologies, pollution prevention and green supply chain management, all of which are
likely to cause improvements in the firms’ environmental performance, usually measured by

300
271

250

200 Africa
173 179
USD billions

Latin America
150 Asia-Pacific
North America
100 93 Europe
Supranational
50 36 44

0 Figure 1.
2014 2015 2016 2017 2018 2019 Growth of the green
bond market
Source(s): International Renewable Energy Agency (IRENA)
MF GHG emissions. Green bonds therefore have the ability to positively impact corporate
47,10 environmental performance.
Furthermore, when firms incorporate green practices through the issuance of green
bonds, they reap economic benefits as well. Green bonds encourage firms to adopt greener
practices across all aspects of the business, which enables 3 things to occur: (1) significant
energy-related cost reductions, (2) improved efficiencies and (3) higher tax incentives granted
by the government (Lagas, 2015; Whelan and Fink, 2016; Volz, 2018). Long-term cost
1488 reductions and tax rebates contribute directly to profitability, whereas better efficiency
translates into the greatest output for the least amount of input. Therefore, green bonds
impact corporate financial performance indirectly, by encouraging companies to commit to
green practices which, in turn, brings about greater profitability and higher financial
valuation (Zhou and Cui, 2019). In other words, green bonds are the catalyst for green
practices, which are a catalyst for wealth creation.
There is no universally-agreed definition of “green investment”, but the term commonly
refers to the raising and allocation of capital toward projects with environmental benefits
(Jones and Comfort, 2020). The most prominent aspect of green bonds is the use of its
proceeds. These are used to finance mainly: renewable energy and energy efficiency,
pollution prevention and control, sustainable land use, biodiversity conservation, clean
transportation, eco-efficient products and climate adaptation (Sartzetakis, 2020). Green bonds
are a significant development in the financial sector as they are a financial innovation for eco-
investing. However, due to a lack of globally accepted green standards, it is difficult to assess
whether green bonds really support green projects. The green bond principles (GBPs) have
even stated that “it will not provide detailed guidance on what is green, leaving this to either
investors themselves or to other parties with special expertise” (OECD, 2016). Although there
are certain guidelines to define the term, no assigned entity enforces these guidelines and
there are no legal consequences against a violating issuer (Talbot, 2017). A green bond is
distinguished from a regular bond just by its label, much like the characteristics of price,
maturity, coupon and issuer’s credit quality (OECD, 2015). Without well-defined metrics,
issuers have freedom in labeling any financial product as “green”.
The lack of accountability and transparency causes the problem of “greenwashing”,
where firms give a false impression of a project or product being more environmentally-
friendly than it actually is (Kenton, 2020a, b). This means that bond proceeds get injected into
assets or projects that bear little environmental value (Weber and Saravade, 2019). Some
firms issue green bonds as a marketing mechanism, using it for the sake of good publicity.
Weber and Saravade (2019) argue that financial regulators focus too much on financial risks
instead of also actively supervising the sustainable aspect of sustainable financial
instruments. Furthermore, while some researchers do not find any differences in bond
yield between green and conventional bonds, others discover a green premium, as there is
evidence that green bonds reward investors with lower yields (Braga, 2020). Thus, there are
ambiguous results about whether the green premium is justified by an improvement in
financial performance.
As the green bond market continues to expand each year, there should be a stronger focus
on the integrity of the “green” label. Green bonds are an extremely new area of research. Few
research studies focus on the effectiveness of green bonds in impacting corporate financial
and environmental performance. Therefore, this study strives to fill this research gap. It aims
to shed light on the effectiveness of green bonds in supporting the development of green
projects by answering the following questions:
(1) Are green bonds effective in improving firms’ environmental performance?
(2) Do green bonds have an impact on corporate financial performance?
Though some research studies have studied the impact of green bonds on firms’ financial Green bonds’
performance in terms of firm value, few have touched on the impact of green bonds on firms’ impact on
financial performance in terms of operational efficiency. As stated earlier, green bond
issuance encourages firms to adopt green practices, which are likely to cause better resource
issuers’
productivity over the long run (Lagas, 2015; Volz, 2018). Since productivity highly correlates performances
with profitability, this may suggest that green bonds indirectly contribute to better
profitability (Foster et al., 2008). This study therefore hopes to contribute to the existing field
by focusing on both the profitability and operational efficiency aspects of corporate 1489
performance. Additionally, this paper is one of the early research studies that investigates
how external certification affects green bonds’ ability to impact firm-level performance. As
discussed previously, due to a lack of consistency in defining a green bond, certification
agencies such as Standard & Poor, Moody’s, and Fitch have emerged as important players in
the green bond market, ensuring that the use of funds is tied to green investments and helping
investors to determine whether they are indeed investing in effective green bonds (Ehlers and
Packer, 2017). However, despite the perceived significance of external certification in the
green bond market, to the knowledge of the authors, there has only been a study by Flammer
(2020) that examines the impact of certified green bonds on firms’ environmental
performance. This study therefore fills in the research gap by investigating the role that
certification agencies play.
Section 2 reviews the literature. It explores the results, implications and conclusions of
past studies. Section 3 explains the data sources, collection process and methods. Section 4
analyses and explores the results, discusses the findings obtained and the implications.
Section 5 concludes and makes suggestions for future research.

2. Literature review
2.1 Green bond issuance
The GBP, a set of voluntary process guidelines intended for the market’s broad use that
promote transparency, disclosure and integrity, defines green bonds as “any type of bond
instrument where the proceeds will be exclusively applied to finance or re-finance, in
part or in full, new and/or existing eligible green projects” (International Capital Market
Association [ICMA], 2018). Green bonds are fixed income financial instruments
whose proceeds are used fund investments that yield environmental or climate-related
benefits, such as renewable energy, clean transportation, sustainable agriculture, energy
efficiency and biodiversity conservation (Baker et al., 2018). While there is no globally
and regulatory standardized definition for “green” and what constitutes a green bond,
organizations have provided various certifications that adhere to particular definitions of
the green label, including different “shades” of green; this has resulted in different
standards gaining acceptance in the green bond market (Talbot, 2017; Ehlers and
Packer, 2017).
On a macro level, Wang and Zhi (2016) argue that if the market mechanisms behind green
finance are rational, green finance encourages the effective management of environmental
risk and supports the optimal utilization of environmental resources by guiding the flow of
funds. Maltais and Nykvist (2020) observe that actors in the green bond market do not
perceive green bonds to play a key role in shifting capital from unsustainable toward
sustainable investments; however, green bonds are perceived to encourage issuers to raise
their ‘green ambitions’. This is because issuers are responding to signals from their
stakeholders on the desire to have access to green investment opportunities, thus supporting
the stakeholder theory [stakeholder theory is the idea that when organizations are faced with
the expectations imposed by external pressures, which come from stakeholders, it influences
their willingness to be involved in sustainability practices (Maltais and Nykvist, 2020)].
MF Additionally, Sartzetarkis (2020) gives a handful of reasons why green bonds is the best
47,10 instrument for the economy to finance low-carbon infrastructure: green bonds support the
development of issuers’ green initiatives, encourages improvements to be made in
environmental risk management and enable more long-term financing of sustainable
projects that are usually difficult to attain.
Shishlov et al. (2016) mention that as the financial sector becomes more involved in
fighting climate change, it could have a “pulling effect”, in which an increase in the supply of
1490 capital for green financial products will stimulate the demand for capital, which in turn,
stimulates the development of green projects. However, Shishlov et al. (2016) believe that this
is not likely to happen unless the green financial market becomes sufficiently large. As
highlighted by Sartzatakis (2020), the main challenge from the demand side of the market is to
increase the market’s size, and this can only be done through making green bonds more
attractive for smaller corporate entities. Furthermore, the green financing market can
improve the matching process between investors’ expectations and available investment
opportunities; this likely improves capital allocation because investors can no longer
overlook eco-investments due to the lack of investment opportunities (Shishlov et al., 2016).
Similarly, Pelini (2019) argues that green bonds can better link capital markets with
environmental projects, therefore enhancing the number of green initiatives.

2.2 Impact of green bonds on environmental performance

Environmental performance is defined as the relationship between the organization and the
environment. It measures the company’s ability to reduce carbon dioxide (CO2), sulfur
dioxide, nitrogen oxides and other GHG emissionsresulting from operations across its supply
chain (Dubey et al., 2015). The evaluation of corporate environmental performance requires
non-financial performance measurements and the aggregation of several types of metrics,
such as GHG emissions, water usage, energy use and waste generation (Ilinitch et al., 1998; Jo
et al., 2015; Ng et al., 2019). Studies have commonly used CO2 emission levels, Thomson
Reuter’s ASSET4 environmental scores and corporate social responsibility (CSR)
participation as proxies for corporate environmental performance. CO2 emission levels are
chosen because for firms in heavily-polluting sectors that are constantly pressured by
regulation, emissions are a critical aspect of environmental compliance (Peixoto, 2009).
Flammer (2021) defines the environmental performance variable as the amount of firm-level
CO2 emissions in tons divided by the book value of assets.
A number of studies have highlighted the positive outcome of green bonds on firms’
environmental and CSR performance (Deng and Lu, 2017; Flammer, 2021, 2020; Sebastiani,
2019; Zhou and Cui, 2019). Deng and Lu (2017) discover that green finance intervention
strategies have a significant impact on CSR improvement, and they propose that introducing
green financing policies is an effective way to improve environmental performance and CSR
since it strengthens the regulation of firm-level environmental pollution. Flammer (2021)
concludes that corporate green bonds are effective in improving companies’ environmental
ratings and lowering their CO2 emission levels, both in the short term and long term,
suggesting that green bonds are a powerful tool in climate financing. Sebastiani (2019)
discovers that energy and utilities companies experience lower CO2 emissions in regards to
the issuance of their first green bond, giving evidence of the instrument’s effectiveness.
According to Zhou and Cui (2019), green bonds produce significant environmental and
economic benefits; additionally, green bond issuance increases companies’ CSR
participation.
Al-Mheiri and Nobanee (2020) believe that when financial management is
executed well, it potentially enhances eco-friendly business operations, and critical to
achieving this sustainability goal is the issuance of green bonds in funding green projects.
Al Breiki and Nobanee (2019), however, add that only corporations that take part in Green bonds’
voluntary social and environmental disclosures will better attain sustainability objectives, impact on
indicating the importance of in-depth disclosure in promoting green bond transparency.
Detailed post-issuance reporting at regular intervals was previously stressed by Chiang
issuers’
(2017) and Zhang (2020), who argue that disclosure is more important than verification, performances
and that high-quality disclosure and issuer transparency are the most important factors in
reviewing bond greenness.
The findings from empirical observations are somewhat different. As highlighted earlier, 1491
the greenwashing problem is one of the major issues encountered by the authorities.
Moreover, even though the Climate Bonds Initiative (CBI) has excluded “clean coal projects”
because of their inability to deliver a sub-2-degree Celsius pathway as stipulated by the Paris
Agreement, and even though clean coal technology does nothing to tackle the massive
pollution caused by coal mining, 38% of Chinese green bonds in 2017 were invested in coal
and fossil fuel-based technologies (Ramstad, 2019). Green bond authorities, namely CBI, GBP
and the Climate Bonds Standard (CBS), constantly disagree on what projects should qualify
as green. Although nuclear power is a hazard in conservation efforts, they are considered
green as a renewable resource; financing water projects are a source of dilemma in the green
bond industry; “clean coal” projects remain banned under CBS but are allowed under less
restrictive guidelines (Trompeter, 2017). In the broader green finance market, investment
funds that claim to be environmentally responsible, such as environmental, social and
governance (ESG) funds, often invest in oil and gas companies and other major corporations
that are significant contributors to the world’s carbon emissions (Frazee, 2019).
In view of the conflicting views and findings regarding the impact of green bonds on the
adoption of green practices, there is still a need to study green bonds’ impact on firms’
environmental performance.
H1. Depending on circumstances (such as the possibility of greenwashing), green bonds
may or may not have a significant impact on reported firm-level GHG emission
levels.
Adding bond certification as a dummy variable, Flammer (2020) shows that green bonds
contribute to environmental performance, but only when they are certified by an external
party. Flammer’s study indicates the importance of certification as a private governance
regime to ensure that green bond proceeds are invested into the appropriate projects.
Bachelet et al. (2019) discovers that, compared to certified green bonds, non-certified green
bonds from private issuers tend to have worse reputations and face higher risk of
greenwashing. Their research suggests that external certification establishes the issuer’s
reputation in the market, signaling to the market about the issuer’s green intentions. The GBP
highly recommends external certification since it involves auditors and independent third
parties to evaluate the green bond’s “alignment with internal standards or claims made by the
issuer” in order to arrive at a rating (Talbot, 2017). External certification plays the key role of
measuring the quantity of emission reductions arising from green investments and ensures
that the use of subsequent funds is tied to green projects (Ehlers and Packers, 2017;
Krogstrup and Oman, 2019). Experts from the socially responsible investment (SRI)
community stressed that “the market will only be credible if there is verification from a third
party”; non-governmental organizations and non-profit agencies are perceived as more
qualified to grade green bonds as these organizations have fewer conflicts of interest
(Chiang, 2017).
The signaling theory can be applied to bond certification within the context of the green
bond market (Rose, 2018; Bour, 2019). The primary purpose of an independent bond review is
to mitigate adverse selection and reduce the risk of greenwashing. Therefore, third-party
certification entities serve as information intermediaries in the market, reducing information
MF asymmetry by signaling to investors and affirming them about the credibility of the bond’s
47,10 green value creation (Rose, 2018; Bour, 2019). In other words, because external certification
increases the transparency of green bonds, and because the signaling theory holds that
increased levels of transparency will reduce information asymmetries between issuers and
investors, certification works as a positive signal to the market (Ingelgard and Regnell, 2018).
Robust external certification has been identified as a key element that enhances the
effectiveness of private governance in the green bond market (Choi, 2020). This is especially
1492 true in an underdeveloped market in which the issuers themselves do not have the expertise
or capacity to provide the required information to investors (Sartzetarkis, 2020).
Certified green bonds are less likely to be a form of greenwashing compared to
non-certified ones for several reasons. First, to qualify as a “certified” green bond, firms are
required to undergo strict verification to fully ensure that the proceeds actually go toward
projects with meaningful environmental benefits (Flammer, 2020). Certification by a third-
party is the most rigorous, in which green bonds must be reviewed based on project eligibility
and evaluation, non-financial aspects of environmental outcomes, management of proceeds
and internal processes of reporting and disclosure (Cochu et al., 2016). Second,
non-compliance with certification is extremely costly, because in the event of non-
compliance, there is a possibility that the CBI will revoke the certification status of the
green bond and exclude the issuer from the green bond market (Banga, 2019; Flammer, 2020).
Thus, only firms with a genuine intention to helping the environment will ever sign up for
external certification. Third, many issuers must certify the “greenness” of their bonds in order
to issue their green bonds at a premium, suggesting the significance of external certification
in reducing information asymmetry (by signaling to the market) and avoiding any suspicion
of greenwashing (Sartzetakis, 2020). In lieu of all these reasons, bond certification is highly
relevant since proceeds from certified green bonds are more likely to be invested in green
projects, which in turn, have an impact on firms’ environmental performance.
H2. Certification has a significant impact on green bond issuers’ GHG emission levels.

2.3 Impact of green bonds on financial performance

Like environmental performance, a handful of studies have also shown the positive effect of
green bond issuance on firms’ financial performance. Using the extended Fama-French
model, Ley (2017) finds that a bond being green indeed positively influences its expected
financial performance. Flammer (2021) concludes that corporate green bonds are effective in
improving companies’ corporate performance in terms of ROA and Tobin’s Q, which are
proxies for profitability and firm value, respectively; also, in sectors where the natural
environment is financially material to the company’s activities, pursuing green projects
contributes more significantly to financial performance. Zhou and Chui (2019) observe that
green bond issuance actively improves Chinese firms’ operational performance, using ROA
and gross profit margin as proxies. Flammer (2020) extends her previous research by adding
bond certification as a dummy variable, and the results showed that green bond issuers
outperform their non-green bond peers in terms of financial performance, but only when they
are certified by independent third parties.
Jo et al. (2015) discover that when firms lower their environmental costs, it increases profit
opportunities and improves their financial performance in the long run, and as Al-Mheiri and
Nobanee (2020) mention, critical to achieving sustainability by lowering environmental costs
is the issuance of corporate green bonds. Zhou and Chui (2019) conclude that as the green
bond market grows, green bonds will play a more significant role in improving corporate
efficiency and operational performance. On a macro level, Weber (2017) finds that integrating
sustainability into the financial industry does not harm financial performance but instead
increases it; his research suggests that green credit policies improves banks’ corporate
sustainability and promotes a more successful financial sector. Furthermore, combining Green bonds’
environmentally responsible funds with other asset classes into one’s portfolio would yield impact on
optimal returns (Rehman and Vo, 2020).
On the other hand, Maltais and Nykvist (2020) state that green bonds are almost identical
issuers’
to regular bonds in terms of financial performance, and that the extra effort of going through performances
green bond labeling, verification and disclosure is unsupported. The authors discover that, in
Sweden, corporations issue green bonds mainly for business incentives, such as better
branding and reduced risks, rather than for financial incentives, such as better financial 1493
returns. Furthermore, as discussed in the introduction, green bond issuance impacts
corporate financial performance rather indirectly. A change in companies’ financial ratios is
impacted by the adoption of green practices or the inclusion of green projects in the business
portfolio, which are, in the first place, fueled by green bonds (Zhou and Cui, 2019). There may
be several other factors at play that can impact companies’ financial performance. At present,
many corporations, especially financial institutions, have been observed to show more
interest in fossil fuel projects; they are reluctant to finance green projects due to the high risks
associated with renewable energy technologies as well as its lower rate of return (Sachs et al.,
2019). The discrepancy between research findings and empirical observations may imply
that green projects do not necessarily lead to better financial returns; otherwise, more
corporations would have been more willing to participate in green bond issuance. Therefore,
although some past studies show that green bonds significantly lead to better financial
performance, there is still insufficient evidence to arrive at this conclusion.
H3. Green bond issuance may or may not have a significant impact on firms’ ROA.
H4. Green bond issuance may or may not have a significant impact on firms’ asset
turnover.
In the 3rd hypothesis, ROA instead of ROE is used since ROE is dependent on the firm’s
leverage position. ROA also takes into account the presence of economies of scale that help to
lower costs and drive up margins (Kenton, 2020a, b). Since there is reportedly a relationship
between green practices (fueled by green bond issuance) and significant cost savings, ROA
has been selected as the independent variable, as ROA is somewhat related to cost reductions
due to its consideration of economies of scale. In the 4th hypothesis, asset turnover is used
since it measures how efficient a corporation is at generating sales from its given assets. As
discussed in the introduction, some of the key benefits of green bond issuance are higher
efficiency in the long run. Therefore, it is appropriate that asset turnover has been included to
study the effect of green bonds on corporate financial performance in terms of its operational
efficiency.
While ROA evaluates assets relative to returns, asset turnover evaluates assets relative to
revenue. Therefore, ROA and asset turnover complement each other, since the former
measures operating performance while the latter measures corporate efficiency.

3. Methodology
3.1 Data collection
Green bond data, including the issuance date, amount issued, use of proceeds and country of
issue are obtained from CBI’s public green bond library. Green bonds issued between 1st
January 2015 and 31st December 2019, comprising of a five-year span, are included in this
analysis. Only green bonds issued in North America, Asia and Europe are selected as these
are the regions with the largest issues of green bonds. Furthermore, bonds whose issuers are
classified under “Government” have been excluded, as government organizations have a
duty to protect the environment and thus are less likely to engage in greenwashing. Since
MF green bonds issued by banks are used to invest in “green loans” rather than green projects,
47,10 which is difficult to compare in this analysis, banks and the financial industry as a whole are
excluded from this study’s green bond database.
The collection of data produced a total of 368 green bond observations. In order to perform
the matching process, a list of non-green conventional bond issues is also obtained. It has
been decided to rely on CBonds, which provides news, market information and statistics
about bonds. Using the same criteria for green bonds (year of issue, region, industry and type)
1494 to filter out the observations for non-green bonds, a total of 377 conventional bonds are
extracted from the database.

3.2 The matching method

One challenge of studying green bond effectiveness is that unobservable factors may drive a
spurious relationship between green bond issuance and firm outcomes (Flammer, 2021). To
understand the alternative situation of how firm outcomes would be without the green bond
issue, a matching methodology is used. The main reason behind performing a matching
procedure stems from the need to create two homogenous sub-groups with equal number of
observations and similar characteristics. Pairing a treated group (issuers of green bonds)
against a control group (issuers of conventional bonds), and assessing the consequences of
the “clinical trial” (green bonds) is the best available approach to understanding the actual
effectiveness of green bonds. This is a quasi-experiment in which the treatment is not
random, since companies do not randomly issue green bonds and companies cannot be
randomly assigned into the treatment and control groups. Thus, the matching methodology
is implemented since it is impossible to conduct a randomized experiment to find out what
would have happened if the green bonds were not green. Manually assigning the treatment
unit with a quasi-experimental control unit potentially produces biased results due to self-
selection and subjective judgment. Thus, the matching methodology solves sample selection
bias by pairing treatment and control observations according to observable characteristics
(Sebastiani, 2019). The end result is sub-groups that are similar based on the selected
covariates or confounding factors.
In this study, the propensity score matching (PSM) method is utilized. Similar studies like
Sebastiani (2019) and Zhou and Cui (2019) have used PSM as the method to match the green
bonds with a control group before proceeding with a regression analysis. Since there are
several variables to deal with, it can be tough to identify which dimension to match the
groups and how to adopt the weighting scheme; thus, PSM provides a natural weighting
scheme that increases the balance between the treated and control groups, resulting in a fairer
estimate of the treatment impact (Dehejia and Wahba, 2002).
The matching process was facilitated by using XLSTAT. The nearest-neighbor technique
is selected, which matches a treated unit with a closest control unit in terms of logit distance.
One logit is equal to the distance along the line of a variable that increases the chances of
observing the specified event by a factor of 2.718, or the value of e^210 (Lamprianou, 2019).
The substantive length of a logit is not pre-determined; instead, it depends on its numerical
value, the distribution of the observations in the experiment and the conceptual distance
between the control elements (Lamprianou, 2019). The value of the logit ranges from negative
to positive infinity. Using logit, PSM provides treated and control units with the greatest
overlap in their propensity scores. “One-to-one match” is selected since it is required to match
each treated unit with one control unit. “Optimal algorithm” and “Mahalanobis distance” are
selected. Mahalanobis distance measures the distance between one point from the central
point, which can be regarded as the overall mean, in a multivariate dimensional space
(Venturini and Garcia, 2015). The caliper option is also activated. A caliper represents the
maximum tolerated difference between treated and control units in a non-perfect matching
situation, when pairs are formed whose propensity scores differ at most by a specified Green bonds’
amount known as the caliper width (Austin, 2011). In this analysis, the default width of impact on
0.1*sigma is selected, representing 0.1*sigma of the logit of the propensity score.
The independent variables used to drive the matching process are: year of issue,
issuers’
geographical area, use of proceeds and amount issued. Except for amount issued, which is performances
quantitative, the variables are all qualitative.
(1) Year of issue. There are five categorical values under year of issue: 2015, 2016, 2017, 1495
2018 and 2019. It is important to match the bonds based on their issuance year so that
the bond issuers are exposed to similar global events in the same macro-economic
environment.
(2) Geographical area. The categorical values are: the United States, China, France, Italy,
Spain, Norway, Germany, Sweden, Poland, Rest of Europe, Japan, Canada, Southeast
Asia, South Korea, the United Kingdom and India. Corporations in the same country
or region operate under a similar regulatory structure and political environment.
They are affected by comparable macro-economic forces.
(3) Use of proceeds. The categorical values are: energy, waste control, transportation,
buildings, agriculture and forestry, diversified and other. It is important to match
based on what the bond proceeds will be used to fund, so that the projects undertaken
will be similar and the results will be comparable.
(4) Amount issued. The bond issuance amount should correspond with the company’s
size and reputation, since larger well-known companies are more likely to raise larger
proceeds by issuing a larger bond issuance amount and vice versa. In turn, size and
reputation play a huge role in influencing firms’ environmental and financial
performance.
After conducting PSM, 166 green bond issuers are successfully matched with 166 non-green
or conventional bond issuers. XLSTAT matches each pair by selecting the non-treated unit
that has the shortest logit distance for each green bond observation. A shorter distance
represents a closer propensity score, which represents a higher degree of similarity between
the treated and control unit. Each green bond issuer is paired with the most similar and
closest control unit. Table 1 shows that 45% of the green bonds from the initial database are
matched whereas 44% of the non-green bonds are matched. XLSTAT also shows the one-to-
one matches, with the propensity scores and logit distance between each pair.
To statistically verify whether the matching procedure was successful, the Z-test is
performed. Using the Z-test, it is possible to check whether the means of two sample groups, in
this case the green bond group and the non-green bond group, differ significantly. Since the
bond issuance amount is the only quantitative variable, the Z-test is conducted on the 5-year
average of the issuance amount.
Using a 5% confidence level, Table 2 shows that the p-values for both one-tailed test and
two-tailed test are more than 0.05. The results show that there is no statistically significant
difference in the means of the issuance amount for both treated and control sub-groups,
indicating the similarity of the treated sub-group with the control sub-group

Categories Number Matched Percentages Unmatched Percentages

Table 1.
1 368 166 45 202 55 Summary of matched
0 377 166 44 211 56 observations
MF 3.3 Difference-in-differences regression model
47,10 Difference-in-difference (DiD) model that uses pooled cross-sectional data is performed to
estimate the causal effect of a specific treatment by comparing the changes in results over
time. It is suitable for observing two groups before and after an intervention, with the
treatment group affected by the intervention and the control group remaining unaffected by
the intervention (Hill et al., 2018). The changes that occur between the two groups across time
is then be examined. Studies in the related areas such as Flammer (2021), Sebastiani (2019)
1496 and Zhou and Cui (2019) have all utilized the DiD model to test the green bond phenomenon.
In general, the DiD model is written as below:
Yit ¼ Ɓ0 þ Ɓ1 * Treati þ Ɓ2 * Timet þ Ɓ3 ðTreati * Timet Þ

where
Yit 5 dependent variable
Treati 5 treatment dummy variable (1 5 treated, 0 5 control)
Timet 5 time dummy variable (1 5 after treatment, 0 5 before treatment)
Treati * Timet 5 interactive dummy variable
The DiD estimate is Ɓ3. It represents the average green bond impact, after controlling for
group and time effects. Specifically, Ɓ3 measures the difference in outcomes from pre-
treatment to post-treatment of each sub-group and then compares the differences in outcomes
of the treatment and control groups. In simpler words, it measures the average change in the
treatment group over time versus the control group over time. If it is positive and significant,
it would confirm the effectiveness of the treatment.
What Ɓ3 measures is illustrated by:
Ɓ3 ¼ ðyb1  yb0 Þ  ðya1  ya0 Þ

where
b1 5 post-treatment treatment group
b0 5 pre-treatment treatment group
a1 5 post-treatment control group
a0 5 pre-treatment control group
Thus, DiD is the difference between two changes: (1) changes in outcome from pre-treatment
to post-treatment and (2) changes in outcome across treatment and control groups. The key

Green Non-Green

Mean 519271025 606491459

Known variance 2.49627Eþ18 6.90754Eþ18
Observations 166 166
Hypothesized mean difference 0
z 0.254396607
P(Z ≤ z) one-tail 0.399594586
Table 2. z Critical one-tail 1.644853627
Z-test of two samples P(Z ≤ z) two-tail 0.799189172
for means z Critical two-tail 1.959963985
underlying assumption of DiD is the parallel trends assumptions. This means that the trend Green bonds’
in the control group is an approximation of what would have occurred in the treatment group impact on
in the absence of the treatment (Shafrin, 2006). The increase in the observed values of the
dependent variable is usually due to 2 factors: treatment and trend. To investigate the
issuers’
effectiveness of the treatment, it is required to isolate the treatment effect. This is where DiD performances
comes in. Therefore, the DiD model shows that in the absence of green bonds, the green bond
issuers would have otherwise followed the trend of the non-green bond issuers. In addition to
the parallel trends assumption, the usual assumptions under ordinary least squares also hold. 1497
3.3.1 Model 1. Four specific models have been used to test the four hypotheses previously
mentioned. The following Model 1 is used to test the first hypothesis:
GHG Emissionsit ¼ Ɓ0 þ Ɓ1 * Greeni þ Ɓ2 * Timet þ Ɓ3 ðGreeni * Timet Þ þ Ɓ4 EMTit
þ Ɓ5 Sizeit þ Ɓ6 OMit þ Ɓ7 ATit þ εit

where
(1) GHG Emissions it 5 GHG emissions (in metric tonnes) / total sales
(2) Greeni 5 treatment dummy variable (1 5 post-bond issuance, 0 5 pre-bond issuance)
(3) Timet 5 time dummy variable (1 5 treatment group, 0 5 control group)
(4) Greeni * Timet 5 treatment and time interaction
(5) Control Variables:
 EMit 5 Total Assets / Total Equity
 Sizeit 5 Natural log of total sales
 OMit 5 Operating Profit / Revenue
 ATit 5 Revenue / Total Assets
(6) «it 5 error term
The first model tests the effectiveness of green bonds in improving the sample firms’ GHG
emission levels, in light of the companies’ green bond issuance. The dependent variable in the
first regression model is the firms’ GHG emission levels divided by the firm’s total sales. GHG
emissions are classified into scope 1, scope 2 and scope 3 specifications. Scope 1 emissions are
the direct emissions from operations that are directly controlled by the company. Scope 2
emissions are the indirect emissions from the generation of purchased energy. Lastly, scope 3
emissions are all indirect emissions that occur within the supply chain of the corporation,
including upstream and downstream emissions (World Resources Institute, 2021). In this
analysis, the dependent variable incorporates all three scopes. GHG emissions data are
extracted from firms’ sustainability and CSR reports, which are available from Global
Reporting Initiative’s sustainability disclosure database. As for the independent variables,
they are all dummy variables, as specified by the DiD methodology. To strengthen the model,
these independent variables are supported by a series of covariates, which will be discussed
later on.
For every sample unit, the Flammer’s (2021) method is adapted in which two observations
of the dependent variable at different times are recorded: pre-treatment and post-treatment.
The pre-treatment observation is recognized as 1-year before bond issuance, while the post-
treatment observation is recognized as 1-year after issuance. For instance, if the bond was
issued in 2017, GHG emissions reported in 2016 is taken as the pre-treatment outcome, while
MF emissions reported in 2018 is taken as the post-treatment outcome. If the bonds have been
47,10 issued in 2019, the emissions reported in 2019 is taken as the post-treatment outcome since
most corporations have not yet published 2020 sustainability reports at the time of writing.
3.3.2 Model 2. The following Model 2 is used to test the second hypothesis:
GHG Emissionsit þ Ɓ0 þ Ɓ1 * Greeni þ Ɓ2 * Timei þ Ɓ3 ðGreeni * Timet Þ þ Ɓ4 Certi

1498 þ Ɓ5 ðCerti * Greeni Þ þ Ɓ6 EMit þ Ɓ7 Sizeit þ Ɓ8 OMit þ Ɓ9 ATit þ εit

where
Certi 5 Moody’s certification dummy variable (1 5 rating present, 0 5 rating absent)
Certi*Greeni 5 certification and bond interaction
All other variables are the same as specified in Model 1
Model 2 is a modified version of Model 1, in which two independent dummy variables are
added into the regression. The certification dummy is used to indicate the absence or presence
of a rating, assigned by Moody’s, to the sample firms. The certification*green interactive
dummy is also added to the regression. The model aims to discover whether third-party
certification helps to distinguish effective green bonds from non-effective green bonds. The
interactive dummy variable is the variable of interest in this model. If its coefficient is
significant, it would indicate that green bond issuers certified by Moody’s fare better than
non-certified green bond issuers in terms of environmental performance.
3.3.3 Model 3. To test the third hypothesis, the following Model 3 is used:
ROAit ¼ Ɓ0 þ Ɓ1 * Greeni þ Ɓ2 * Timet þ Ɓ3 ðGreeni * Timet Þ þ Ɓ4 DSit þ Ɓ5 Sizeit þ εit

where
(1) ROAit 5 Net profit after tax / Total assets
(2) Greeni 5 treatment dummy variable (1 5 post-bond issuance, 0 5 pre-bond issuance)
(3) Timet 5 time dummy variable (1 5 treatment group, 0 5 control group)
(4) Greeni * Timet 5 treatment and time interaction
(5) Control variables:
 DSit 5 Long-term liabilities / Total sales
 Sizeit 5 Natural log of total sales
(6) «it 5 error term
The third model tests the effectiveness of green bonds in improving the sample firms’ ROA
performance. In this model, the dependent variable is measured by taking the net income after
tax and dividing it by the firm’s total assets. ROA ratios are obtained from Morningstar
Financials. If the corporation is not included under Morningstar, then the values are obtained
from annual reports and the ratios computed. For every sample unit, the one-year pre-bond
issuance finding and the one-year post-bond issuance finding of the dependent variable are
recorded.
3.3.4 Model 4. To test the fourth hypothesis, the following Model 4 is used:
ATit ¼ Ɓ0 þ Ɓ1 * Greeni þ Ɓ2 * Timet þ Ɓ3 ðGreeni * Timet Þ þ Ɓ4 DSit þ Ɓ5 Sizeit þ εit
where Green bonds’
impact on
ATit 5 Total sales/ Total assets issuers’
All other variables are the same as specified in Model 3 performances
The fourth model tests whether green bond issuers significantly report better asset turnover
performance compared to conventional bond issuers. Asset turnover (AT) ratios are obtained 1499
from Morningstar Financials and annual reports. Again, for every sample unit, one pre-
treatment observation and one post-treatment observation of the dependent variable are
recorded.
3.3.5 Control variables. The models include a set of variables to control for other possible
influences on the dependent variables. For Models 1 and 2, they are size, equity multiplier,
operating margin and asset turnover. For Models 3 and 4, they are size and debt-to-sales (D/S).
While not causal themselves, these variables are included as they are sufficiently correlated
with omitted causal factors. These covariates are similar to the study conducted by Elsayed
and Paton (2005), who argue that firm size is relevant because the existence of economies of
scale is more prominent in environmentally-focused investment. Previous literature also
shows that firm size and operating margin has a positive impact on environmental
performance (Ong et al., 2016; Weng et al., 2015; Huang et al., 2009; Ziegler and Seijas, 2009).
Furthermore, debt capacity, measured by equity multiplier and D/S, controls for the
possibility that some treated firms have better access to public funds (Flammer, 2021).

4. Analysis and findings

4.1 Descriptive statistics
Table 3 (Panel A) shows the geographical distribution of the green bond issues with 32.50%
of the green bonds are issued in China (including Taiwan and Hong Kong), comprising the
largest geographical group. The second largest geographical area is the US, comprising
18.75% of the green bond issuers. Several European countries are also prominent issuing
regions, such as the UK, Germany and France, comprising about 5% each. The sample in this
study is decentralized in terms of geographical area because the remaining issuers are spread
out across seven regions.
In terms of the distribution of the usage of green bond proceeds [see Table 3 (Panel B)],
majority of the issuers used the funds raised from issuing bonds to finance projects that are
related to clean energy. The second largest project financed by the bonds is “Buildings”,

Panel A Panel B
Country of issuance Percentage Use of proceeds Percentage

China 32.50 Energy 43.75

United States 18.75 Buildings 22.50
Southeast Asia 10.00 Transport 13.75
United Kingdom 5.00 Waste Control 7.50
Germany 5.00 Diversified 5.00
France 5.00 Agriculture and Forestry 2.50
India 3.75 Other 5.00
Canada 3.75
Italy 3.75
Spain 2.50 Table 3.
Norway 1.25 Descriptive statistics –
Sweden 1.25 country of issuance
Rest of Europe 7.50 and use of proceeds
MF followed by “Transport”, followed by “Waste Control”, followed by “Diversified” and “Other”
47,10 and lastly by “Agriculture & Forestry”.
The descriptive statistics for the bond issuance amount are shown in Table 4. The average
bond issuance amount is USD 519.27 million, whereas the most common and repeated
issuance amount is USD 1.00 billion. The median is USD 156.00 million. The maximum value
in the observations is USD 13.80 billion while the minimum value is USD 1.00 million.
1500
4.2 Environmental performance
Table 5 shows the results of Models 1 and 2. In Model 1, the simple DiD is run first without
the control variables, the F test is insignificant, and the R2 is rather low at 1.50%. When the
control variables are added, it becomes jointly significant, and 17.50% of the variation in the
firms’ GHG emissions can be explained by the predictors and additional controls. It is thus
important to add the control variables into the DiD model in order to obtain a significant
F test.
Focusing on Model 1’s results, none of the pure DiD covariates (time dummy, green
dummy and green*time interaction) shows significance. The interactive dummy coefficient
(the DiD estimate) shows that one year after issuing green bonds, green bond issuers emit
total GHG levels that are 0.2% higher compared to non-green bond issuers one year prior to
bond issuance. However, the DiD estimate is insignificant. Thus, there is insufficient evidence
to conclude that issuing green bonds improves firms’ environmental performance in terms of
GHG emissions.
To find out the significance of third-party certification, certification was added as a
dummy variable and interactive variable in Model 2. Looking at Model 2’s results in Table 5,
both the models with control variables and without control variables have significant F
statistics. In the model with controls, 19.90% of the variation in GHG emissions can be
explained by the covariates. Focusing on the individual coefficient’s results, none of the DiD
covariates are found to be significant. This is in line with the results from Model 1. The
variable of interest, which is the certification and green interactive variable, is significant at
the 95% confidence level. This suggests that certified green bonds emit GHG levels that are,
on average, 2.10% lower than non-certified conventional bonds issuers’ emissions. Thus,
there is sufficient evidence to conclude that issuing green bonds that are certified by a third
party, as compared to green bonds that are non-certified, improves firms’ environmental
performance.
As for the control variables, size is found to be negative and significant at the 99%
confidence level. The larger the firm, the lower its standardized GHG emissions by about
0.60–0.70%. The finding corresponds to previous studies which argue that larger firms tend
to perform better from an environmental standpoint due to the wider range of resources that
they can utilize (Deng and Lu, 2017). AT is positive and significant at the 90% confidence
level. The more efficient the company is at generating sales from assets, the higher its

Amount issued (USD)

Mean 519,271,025
Median 156,000,000
Table 4. Mode 1,000,000,000
Descriptive statistics – SD 1,579,959,396
bond issuance Minimum 1,000,000
amount (USD) Maximum 13,800,000,000
 Model 1 Model 2
Green bonds’
Variable GHG emissions GHG emissions impact on
issuers’
Constant 0.147 (0.000***) 0.135 (0.00***)
Time 0.001 (0.869) 0.001 (0.873) performances
Green 0.002 (0.817) 0.016 (0.110)
Time*Green 0.002 (0.831) 0.002 (0.828)
Cert 0.007 (0.352) 1501
Cert*Green 0.021 (0.045**)
EM 0.000 (0.805) 0.000 (0.849)
Size 0.007 (0.000***) 0.006 (0.000***)
OM 0.000 (0.942) 0.000 (0.940)
AT 0.010 (0.088*) 0.011
(0.082*)
R Squared
with controls 0.175 0.199
without controls 0.015 0.071
F test
With controls 4.592 (0.000***) 4.134 (0.000***) Table 5.
Without controls 0.807 (0.492) 2.362 (0.042**) Results of difference-
Note(s): p-value in parentheses in-differences
*, ** and *** denotes significance at the 10%, 5% and 1% level, respectively regression

standardized GHG emissions by about 1.00%. The finding is not in line with previous
research which discovered that asset turnover has an insignificant impact on GHG emissions.

4.3 Financial performance

The third and fourth regression models were constructed to find out the effect of green bond
issuance on corporate financial performance.
Referring to Table 6, in the third model without controls, 1.20% of the variability in ROA
can be explained by the DiD regressors. When the control variables are added, 1.30% of the
variability in ROA can be explained by the predictors and the controls. But the F test shows
that both models are insignificant. This suggests that the independent variables, including
green bond issuance, cannot be related to ROA. Focusing on the individual coefficients in
Model 3, none of the DiD covariates are found to be significant (The DiD estimate is a negative
value, indicating that green bond issuers generate an average ROA in the post-treatment
period that is lower compared to conventional bond issuers in the pre-treatment period).
Overall, there is not enough evidence to conclude that green bond issuers outperform
conventional bond issuers in terms of ROA.
Model 4 uses asset turnover as the proxy for corporate efficiency. The F test with the
control variables is significant at the 95% confidence level. Analyzing the individual
coefficients, none of the DiD covariates are found to be significant. Similar to Model 3, the DiD
estimate shows a negative but insignificant relationship. One year after issuing green bonds,
green bond issuers report asset turnover ratios that are on average lower compared to
conventional bond issuers one year prior to bond issuance. Overall, there is insufficient
evidence to conclude that issuing green bonds improves firms’ efficiency, measured by asset
turnover.

4.4 Robustness test

The original DiD models do not control for unobserved firm-specific characteristics. For
example, some firms are headed by better management, some receive government support,
MF Model 3 Model 4
47,10 Variable ROA AT

Constant 4.603 (0.070*) 0.678 (0.014**)

Time 0.347 (0.612) 0.026 (0.730)
Green 5.11 (0.456) 0.034 (0.649)
Time*Green 0.298 (0.756) 0.024 (0.821)
1502 DS 0.000 (0.857) 0.000 (0.989)
Size 0.065 (0.549) 0.051 (0.000***)
R Squared
with controls 0.013 0.083
without controls 0.012 0.010
F test
Table 6. with controls 0.638 (0.671) 4.391 (0.001**)
Results of difference- without controls 0.947 (0.418) 0.853 (0.466)
in-differences Note(s): p-value in parentheses
regression *, ** and *** denotes significance at the 10%, 5% and 1% level, respectively

etc. To control for unobserved firm-specific characteristics, they are included as another error
term (represented by ci) in the regression. Therefore, the DiD regression model is modified as
follows:
Yit ¼ Ɓ0 þ Ɓ1 * Treati þ Ɓ2 * Timet þ Ɓ3 ðTreati * Timet Þ þ ci þ εit

where
ci 5 any unobserved characteristics of individual firms i that do not change over time
ci contaminates the regression model, but it can be eliminated by analyzing the changes in the
dependent variable from the pre-issuance period to the post-issuance period. Since Dt 5 0 in
the pre-treatment period and Dt 5 1 in the post treatment period, the observation for t 5 1 can
be subtracted from that of t 5 0.
Yi2 ¼ Ɓ0 þ Ɓ1 * Treati þ Ɓ2 * 1 þ Ɓ3 ðTreati * 1Þ þ ci þ εi2
−Yi1 ¼ Ɓ0 þ Ɓ1 * Treati þ Ɓ2 * 0 þ Ɓ3 ðTreati * 0Þ þ ci þ εi1
Δ Yi ¼ Ɓ2 þ Ɓ3 Treati þ Δ εi

The contaminating factor has disappeared, so all unobservable features have now dropped
out. The parameter Ɓ2 has become the new intercept. The most important parameter, Ɓ3,
which measures the treatment effect, is the coefficient of the treatment dummy variable. This
differenced data is applied to the previous models and results in the following additional
models, where Model 5 is the result of differenced data on Models 1 and 2 (in Model 2, the cert
and cert*green variables have dropped out due to the differencing process), and Models 6 and
7 are the results of differenced data on Models 3 and 4, respectively.
Model 5:
Δ GHG Emissionsi ¼ Ɓ2 þ Ɓ3 Greeni þ Δ Ɓ4 EMi þ Δ Ɓ5 Sizei þ Δ Ɓ6 OMi
þ Δ Ɓ7 ATi þ Δ εi
Model 6: Green bonds’
Δ ROAi ¼ Ɓ2 þ Ɓ3 Greeni þ Δ Ɓ4 DSi þ Δ Ɓ5 Sizei þ Δ εi impact on
issuers’
Model 7: performances
Δ ATi ¼ Ɓ2 þ Ɓ3 Greeni þ Δ Ɓ4 DSi þ Δ Ɓ5 Sizei þ Δ εi

Overall, the main finding of Model 5 (shown in Table 7) remains substantially similar to the 1503
original models (Models 1 and 2). The green dummy variable (the DiD estimate in this case)
remains insignificant. Nonetheless, for the control variables, the differenced operating
margin and the differenced asset turnover are significant at 99 and 95% confidence levels,
respectively. The growth of GHG emissions decreases by 2.10% for every 1% increase in the
growth of operating margin, whereas the growth of GHG emissions increases by 1.60% for
every 1% increase in the growth of asset turnover. The main findings of Models 6 and 7 (in
Table 8) are also consistent with the respective original models. The green dummy coefficient
(the DiD estimate in this case) remains insignificant, which corresponds to the original
models’ results (see Table 8).

4.5 Discussion
The current study’s results indicate that green bonds contribute to better environmental
performance, but only when they are externally certified by a renowned rating agency (for
example, Moody’s). This is in line with previous literature whose findings show that external
certification plays an important role in differentiating green bonds that yield environmental
benefits versus green bonds that are used as a greenwashing tool, though there are certain
literature studies which discovered that green bonds, regardless of whether they are certified
or non-certified, are effective in improving corporations’ environmental performance. The
current findings point to the problem of weak governance in the green bond market and the
essential role that external certification plays in filling this gap. It stresses that, in a market
dominated by weak governance, certification serves as an alternative private governance
regime. Private external certification establishes green bonds’ credibility in the broader
sustainable finance market.
From the theoretical perspective, the findings are congruent with the signaling theory
argument (Bour, 2019; Halim et al., 2019; Flammer, 2020). Due to the costs associated with
certifying a green bond, certification is a costly signal and therefore reflects a stronger and
more trustworthy commitment toward the environment (Flammer, 2020). Presently, due to
information asymmetry, investors have limited or incomplete information about the actual

Model 5
Variable Δ GHG emissions

Constant 0.001 (0.661)

Green 0.003 (0.217)
Δ EM 0.000 (0.716)
Δ Size 0.004 (0.132)
Δ OM 0.021 (0.001***)
Δ AT 0.016 (0.047**)
R Squared 0.169
F test 3.006 (0.016**) Table 7.
Note(s): p-value in parentheses Regression results on
*, ** and *** denotes significance at the 10%, 5% and 1% level, respectively differenced data
MF “greenness” of the bond and the true intentions of the issuer. In other words, there is a gap in
47,10 the green bond market; the demand for green bonds is high, but public confidence in green
bonds is low. External certification therefore bridges this gap by confirming the quality of the
green bond issuance. It serves as a “seal of approval” that distinguishes credible green bonds
from green bonds with a higher risk of greenwashing, which signals to investors the
transparency of the bonds, which ultimately reduces information asymmetry (Rose, 2018;
Bour, 2019; Bachelet et al., 2019). The findings are also consistent with arguments from
1504 previous literature such as Talbot (2017), Ehlers and Packer (2017), Choi (2020) and
Sartzetarkis (2020), who agree that external certification is particularly vital in a market
where there is still a lack of transparency and regulatory enforcement.
Green bonds, which has been in the market for only 14 years, is still in its developing
phase. The principles guiding corporations to issue green bonds have not yet matured. The
law enforcement mechanisms in ensuring that green bond proceeds are channeled to low-
emission projects are still underdeveloped. Because the regulatory aspect of the green bond
market is still unstable, there is a tendency for corporations to take advantage of the public’s
growing preference for green financial products, often in an unethical way, thereby causing
the greenwashing problem. This is why at this stage of development, green bonds are indeed
a common greenwashing practice, as demonstrated by the empirical observations in the
literature, such as in the recent studies by Trompeter (2017), Ramstad (2019) and Frazee
(2019) in which firms channel the funds to “clean” but unsustainable investments. Therefore,
at this point in time, external bond certification is required in order to distinguish high-quality
green bonds from low quality green bonds. Private certification may be the best solution at
hand to the current governance problem. Thus, green bonds’ dependency on external
certification is not because the instrument itself is ineffective, but rather, a part of the young
market’s learning curve. The findings in this paper therefore implies that regulatory
authorities should alter green bonds’ regulatory framework and encourage private
certification agencies to play a key role in promoting green finance and mitigating
greenwashing.
The current findings also show that green bonds do not effectively contribute to better
operating performance and corporate efficiency, both of which are components of financial
performance. The findings agree with previous literature such as Sachs et al. (2019) and
Maltais and Nykvist (2020), who argue that green bonds are almost identical to conventional
bonds in terms of the financial benefits they bring. It however contradicts previous studies
like Ley (2017), Flammer (2021) and Zhou and Chui (2019), whose results show that green
bond issuers have superior financial performance and that green bonds contribute to value
creation. This study suggests that the premiums found in green bond yields are not justified,
since green bond issuers do not show any superiority in financial performance. Therefore, the

Model 6 Model 7
Variable Δ ROA Δ AT

Constant 1.290 (0.024**) 0.033 (0.094*)

Green 0.997 (0.214) 0.013 (0.627)
Δ DS 0.001 (0.495) 0.000 (0.000***)
Δ Size 0.054 (0.702) 0.003 (0.563)
R Squared 0.018 0.338
Table 8. F test 0.731 (0.535) 20.383 (0.000***)
Regression results on Note(s): p-value in parentheses
differenced data *, ** and *** denotes significance at the 10%, 5% and 1% level, respectively
investment community must be aware that diversifying one’s portfolio to include green Green bonds’
bonds will not necessarily increase the portfolio’s returns particularly in the short run. impact on
As discussed in the literature review, green bonds fuel green innovation in firms, which is
likely to grant cost advantage and improve operational efficiency. Since green bonds do not
issuers’
directly impact firm-level financial performance, a longer time interval (for example, 3–5 performances
years) may be required in order to accurately measure the impact on financial performance. In
business, going green often comes with high up-front costs, such as research and
development, implementation and employee training, which would only pay off years later 1505
(Confino, 2014; Frazee, 2019). The gains are always going to be more long-term than
immediate, and sometimes, the cost reductions in energy savings gained from green practices
are insufficient to cover the up-front investments of going green (Joseph, 2019; Jones, 2019).
This is the challenge for green businesses, as many business leaders are reluctant to sacrifice
short term profits for long-term sustainability in their companies (Whelan and Fink, 2016).
Such findings also suggest that, if the firm is unwilling to sacrifice over the short-term, it
would be better to implement end-of-pipeline solutions (a pollution control approach that
regulates GHG emissions just before they enter the atmosphere) rather than assimilate green
practices across all aspects of the business. However, early green practices like pollution
prevention and waste reduction are known to have a longer-term impact on the environment
compared to end-of-pipeline solutions (Weng et al., 2015). If green bond proceeds were used to
fund solutions that bear little long-term environmental value, it would defeat its whole
purpose.
Due to the newness of green bonds, the lack of a significantly different GHG performance
and financial performance between the treated and control sub-groups in this study could just
be a consequence of the short timeframe used (post-treatment observation of one-year after
bond issuance). The previous literature has discovered better corporate performance over
the long run after green bond issuance, as compared to the short run (Flammer, 2021). The
findings therefore suggest corporations to issue longer term green bonds in order to reap the
financial and environmental benefits of green bonds. Moreover, this study did not take into
account the quality of disclosure for each firm. In the literature review, it was argued that
firms with more transparent disclosure tend to have a less serious greenwashing problem. In
this study, since firms that did not disclose their GHG emissions was omitted from the sample
(as there is no available measure for environmental performance), it has likely affected the
results as there is no distinction between high-quality disclosure firms and low-quality
disclosure firms.
Finally, our results imply that apart from the issuance of green bonds, unobservable
effects have a drastic impact on firms’ environmental and financial performance. Although
this study utilizes a quasi-experiment method, it cannot substitute for the real world and its
unobservable factors. These factors could be firm-specific, industry-specific, or macro-level,
which can be difficult to measure. As the current study measures mainly quantitative factors,
it may be necessary to take into account a number of qualitative factors, such as board
composition, first time or recurrent bond issuance, legal constraints on transparency and
environmental regulations. It can be concluded that corporate environmental and financial
performance is extremely sensitive to empirical settings in the real world. What this implies is
that one should not expect to depend entirely on green bonds to improve the environmental
performance of corporations.

5. Conclusions
This study discussed the growing popularity of green bonds as a green financing tool and the
governance problem that currently dominates the green bond market. The study analyzed
the impact of green bond issuance on firms’ environmental and financial performance, using
MF data from green bond and conventional bond issues from 2015–2019. The PSM and DiD
47,10 methodologies were used.
The findings in this study are summarized as follows: (1) non-certified green bonds do not
have an impact on corporations’ environmental performance (2) certified green bonds
contribute positively to improved environmental performance (3) green bonds do not have an
impact on issuers’ operating performance and efficiency. Three key points are implied from
this analysis. First, green bonds’ dependency on third-party certification is not due to the
1506 ineffectiveness of the instrument itself, but due to the green bond market’s developing phase.
The phenomenon is merely part of the market’s learning curve. This is why external
certification plays such an essential governance role at this stage. Second, the environmental
and financial benefits of issuing green bonds will only be seen over the long term; therefore,
corporations should aim to issue longer term green bonds. Third, unobservable factors in the
real world have an enormous impact on environmental and financial performance, so one
must not depend entirely on green bonds to improve the corporate performance.
This study calls for future research. First, as green bonds have only been introduced
recently, results are based on a small number of observations. There is also little disclosure of
firm-level environmental information. With the improvement of environmental disclosure
and with more data becoming available, future studies could provide better larger scale
evidence of the long-term impact of green bonds on corporate performance. Second, although
PSM helps to mitigate endogeneity, where green bonds are correlated with error terms, it
cannot substitute for a pure quasi-experiment. Future studies must therefore introduce
alternative ways to measure green bond effectiveness. They could do so by including
empirical settings (e.g. changes in regulations) based on developments in the green bond
market.

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Corresponding author
Sin-Huei Ng can be contacted at: shng@xmu.edu.my

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