Green-labeled bond and sustainable bond: A missing puzzle piece

Climate change and environment-related problems are major concerns globally. Stakeholders including governments, corporates, investors, and customers, play different roles in building a sustainable world. Their tasks are challenging because of limited financial resources. To finance activities that benefit the environment and minimise the severe impact of climate change, green-labeled bonds are one of the resolutions. With the green features, this type of fixed-income asset can signal investors and customers that the green bonds’ issuers are doing “good” for the future. However, there are other bonds that also hold similar green features as green-labeled bonds, but they are not readily recognised in the bond market. This paper describes a procedure to classify a new category for green-unlabeled bonds and call this as sustainable bond. The performance of green-labeled and sustainable bonds are compared. Evaluating the bond performance underpins the greenium fundamental of green bonds, and provides insight into applications of the new sustainable bond category in the economy. The Green Instrument Indicator (GII) is used to screen all green-labeled bonds (green bonds, hereafter) in the universal debt market on Bloomberg. Green bonds are issued by corporate, municipal, government, supranational, and multinational issuers. Sustainable bonds comprise all green-unlabeled bonds in the debt market that are identified and classified as climate bonds, sustainability bonds, and Environmental, Social, and Corporate Governance (ESG) bonds. We use three screening steps to identify sustainable bonds. First, we select climate bonds classified in the Bloomberg Industry Classification System (BICS). Second, we expand the screening criteria to the use of proceeds to screen sustainability bonds. Third, ESG bonds are selected using the management of proceeds (ESG) criterion. Based on data from 1 January 2012 to 30 November 2021, we obtained 4295 green bonds and 2955 sustainable bonds (1422 climate, 861 sustainability, and 672 ESG). Thus, 7250 bonds are used in this study. We find that, in the short term, green-labeled bonds do not outperform green-unlabeled counterparts in terms of bond liquidity. In the long term, our result shows that green-labeled bonds are traded at 20 bps lower in terms of bond yields than green-unlabeled bonds. The result indicates the existence of a greenium effect between the two groups of green bonds: labeled and unlabeled. Our finding expands the current literature on the greenium phenomenon between green and vanilla bonds to the greenium effect that also holds within the green bond group. The pricing difference can be explained by a green label representing less information asymmetry on the greenness of bonds with lower potential environmental risk. Therefore, some investors prefer to pay a higher price for green labels. For the relationship between bond performance and bond features, our results reveal that the type of bond ownership plays a key role in explaining the performance of green bonds