Sovereign green bonds: a catalyst for sustainable debt market development?

Summary

Focus

We research whether sovereign green bonds contribute to the development of sustainable corporate bond markets. We first construct a database of labelled bonds issued by sovereign governments and corporations. The database includes variables related to the size as well as the reporting and verification of green and other labelled bonds. It also includes data on the pricing and liquidity of corporate sustainable bonds. We then employ regression and event study analysis to assess the impact of sovereign green bond issuance on the growth, liquidity and pricing of corporate sustainable bonds as well as standards of green reporting and verification in the same jurisdiction.

Contribution

In conventional bond markets, the role of sovereign bonds in providing benchmarks and contributing to corporate bond market development is well established. But because sovereign issuers are latecomers to sustainable bond markets, the impact of sovereign green bond issuance on corporate bond markets is not as well researched. In addition to its impact on market growth, liquidity and pricing, we also assess whether sovereign issuance can contribute to market development through greater reporting and verification of sustainability.  

Findings

We find that sovereign green bond issuance does in fact result in increased corporate sustainable bond issuance. This effect is more pronounced in countries with stronger climate policies. We also document an improvement in the quality of green disclosure and verification standards in the corporate bond market, as increasing numbers of corporate issuers use green verification than before the sovereign issue. Finally, we find evidence of greater liquidity and diminished yield spreads in the corporate market after sovereign issuance, although this impact is limited to the debut sovereign green bond issue.   

Abstract

In traditional bond markets, sovereign bonds provide benchmarks and serve as catalysts for corporate bond market development. Contrary to the usual sequence of bond market development, sovereign issuers are latecomers to sustainable bond markets. Yet, our empirical study finds that sovereign green bond issuance can have quantitative and qualitative benefits for the development of private sustainable bond markets. Our results suggest that both the number and the size of corporate green bond issuance increase more in a jurisdiction after the sovereign debut. The results are more pronounced in countries with stronger climate policies. Sovereign green bond issuance also improves the quality of green verification standards in the corporate bond market more generally, consistent with the aim of fostering third-party reviews and promoting best practice in green reporting and verification. Finally, our work provides evidence that the sovereign debut increases liquidity and diminishes yield spreads of corporate green bonds in the same jurisdiction.

JEL Classification: H63, O16, Q01, Q50

Keywords: green bonds, sustainable bonds, sovereign debt, taxonomies, green verification, bond market development