Before proceeding to the analysis of green bonds, let us consider the main concepts and trends in the

development of the green bond market as a whole. Green bonds are one of the most recognized
instruments for financing green projects. Although the volume of green loans is also growing, green
bonds make up the bulk of green debt. Like conventional bonds, green bonds are long-term debt
instruments. Green bonds typically have the same seniority, right of redemption, and rating as the
issuer's conventional bonds. The main difference between green bonds and conventional bonds is that
the funds generated from green bonds are used for climate and environmentally friendly projects
(Levine, 2019). These are typically investments in clean energy, energy efficiency, green buildings, and
electrified transportation (International Capital Markets Association, 2021). Green bonds rely on third-
party certification and investor confidence to guarantee that bond proceeds will be used for the
intended green investment. In essence, green bonds are conventional bonds with green promises
(Levine, 2019).

Currently, there is no single global regulatory framework for green bonds. Instead, green bonds are
typically structured according to the Green Bond Principles published by the International Capital
Markets Association (ICMA, 2021). The Principles provide voluntary guidance on the selection,
management, evaluation, and disclosure of green projects when issuing green bonds. The Principles
recommend (but do not mandate) third-party certification of green bonds. Because compliance with the
Principles is voluntary, funds from some green bonds may not be invested in meaningful green projects,
a process that reflects a broader trend of greenwashing (misuse of green labeling) in the sustainable
finance industry (Wirz, 2022; Fletcher & Oliver, 2022; Mundy, 2022; The Economist, 2021; Fancy, 2021).

The overall green bond market has been growing rapidly in recent years, with issuance reaching $556
billion in 2021. This is a significant increase from $31 billion in 2014, and the compound annual growth
rate for the market as a whole is about 50%. Some market participants expect a significant increase in
green bond issuance in 2022 (Kuchtyak & Bruce, 2022). Green bond issuance is taking place in many
countries, with European issuers being the most active, followed by US, Chinese, and supranational
issuers. Approximately three-quarters of annual green bond issuance is denominated in euros or U.S.
dollars.

Green bonds were first issued in the late 2000s by supranational organizations such as the European
Investment Bank and the World Bank. Although supranational organizations (and governments) still
issue green bonds, corporations now account for about two-thirds of global issuance (Flammer, 2021).
Private companies issuing green bonds tend to be large, mature or have good access to debt capital
markets. This is especially true for companies issuing green bonds in foreign currencies to access
international green capital markets. In addition, issuers tend to be companies operating in relatively less
carbon-intensive industries and tend to be greener than their peers (Flammer, 2021).

About half of green corporate bond issuance is concentrated in financial firms. Most of the issuance of
green corporate bonds by financial institutions is by banks, which use the proceeds from green
corporate bonds to finance companies that need funds for green projects. Alternatively, banks first
provide green loans, which are then securitized to issue green bonds (Ritchie & Rocha, 2021). Most of
the remaining issuance by finance companies is by real estate financial institutions, such as real estate
investment trusts (REITs), which typically finance the construction of green buildings. The electricity
sector accounts for another quarter of green bond issuance. The remaining quarter of green corporate
bond issuance is spread across a variety of sectors that are seeing increased issuance, including
alternative energy, automotive, and heavy industry. Notably, very little issuance is accounted for by
fossil fuel companies.

With the recent significant increase in green bond issuance, policymakers, market participants, and
financial journalists have recognized the potential of green bonds to finance green investments.
However, while individual green bonds can have tangible positive effects, the broader green bond
market has a number of drawbacks. Major concerns include green bond laundering, the lack of a
universal governance and certification system, and the significant compliance costs associated with
certification, issuance, and reporting (Ritchie, Ward, Kishan, & Gledhill 2021; Stubbington & Nauman
2020). Critics also question whether the green bond market actually influences corporate investment or
whether green bonds finance green projects that would not otherwise be financed. The question
remains, "Does the green bond market as a whole incentivize meaningful green investment?"

Companies issuing green bonds can realize a number of direct and indirect benefits that promote green
investment. Issuing green bonds can directly reduce the interest rate on bonds compared to
conventional bonds. If companies decide to issue green bonds, they can attract new investors interested
in green investments, which increases the demand for the bonds. If the increased demand results in the
yield of a green bond being lower than the yield of an equivalent or hypothetical conventional bond, this
difference in yield is referred to as the green premium or "greenium" (Ehlers & Packer, 2017; Gianfrate
& Peri, 2019;. Partridge & Medda, 2020; Larcker & Watts, 2020; Baker, Bergstresser, Serafeim, &
Wurgler, 2022; Kapraun, Latino, Scheins, & Schlag, 2021). However, the sample period, the focus on
green bond market segments, primary and/or secondary markets, and the significantly different
empirical methodologies make it difficult to analyze and compare the results of each paper. In addition,
some papers use an approach that limits the sample to a small number of issuers and a large number of
outstanding bond issues to establish meaningful correspondences, while others require a large global
panel and a large number of control variables to meaningfully account for issuer- and bond-level
differences. Some papers use a fixed-effects regression approach, which requires a large global panel
and a large number of control variables to meaningfully account for differences at the issuer and bond
level. As a result, no conclusions can be drawn about the existence and sustainability of potential green
reefs of corporations at the time of issuance. The objective of this paper is to carefully select the most
appropriate empirical approach to measure the greenium of a specific set of green bonds based on a
global sample of green bonds.

In addition to the direct benefits of green bonds, green bonds can also bring indirect benefits to the
issuer. For example, green bonds may lower a company's cost of capital by attracting new investors or
increase operational efficiency by attracting new customers because they emphasize the issuer's
environmental credibility. This perceived indirect effect is referred to as the "green halo" effect
(Flammer, 2021; Tang & Zhang 2020; NatWest Markets, 2019; Baulkaran, 2019; Forfot & Fosse, 2021).
While the green halo is not the focus of this paper, the focus is on understanding whether the benefits
of issuing green bonds differ from the potential long-term improvement in a firm's cost of capital. The
argument in favor of issuing green bonds to obtain a green halo can be located in the theoretical context
of the signaling problem (Flammer, 2021). Companies have asymmetric information about their
environmental merits, such as future emission reduction plans. If such information is not or cannot be
effectively communicated to investors who favor sustainability, companies may find themselves in a
situation of suboptimal cost of capital. Issuing green bonds can provide a (potentially costly) solution to
the problem of communicating information and achieving a more optimal cost of capital.