UNDERSTANDING THE PRICING DYNAMICS OF ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) BONDS FROM THE CORPORATE ISSUER’S PERSPECTIVE

Abstract

The market for Environmental, social, governance (ESG) bonds has grown rapidly in recent years, providing an alternative form of debt financing for companies to raise capital. Using a dataset comprising 280,856 global corporate bonds (3,456 ESG bonds), from January 2013-2022, we document a pricing premium for ESG bonds compared to conventional bonds, suggesting a lower borrowing cost for companies issuing ESG bonds. Our results further document the reputational effect where the first bond issued by the company has a higher yield spread (higher financing cost) than the subsequent bonds issued by the same company. However, the reputational effect is independent of the ESG label. We further shed light on the ESG pricing dynamics in different sectors namely banks and real estate, and in the China market, presenting varying results.