This paper was presented at the 2018 Municipal Finance Conference on July 16 & 17,2018. The conference is a collaboration of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, the Brandeis International Business School’s Rosenberg Institute of Public Finance, Washington University in St. Louis’s Olin Business School, and the University of Chicago’s Harris Institute of Public Policy. It aims to bring together academics, practitioners, issuers, and regulators to discuss recent research on municipal capital markets and state and local fiscal issues.
|Use of proceeds||Green ($ M)||Ordinary ($ M)|
|Water and Sewer||5,210||170,000|
Source: Baker, Bergstresser, Serafeim, and Wurgler (2018).
[A] subset of investors are willing to give up returns in order to hold green bonds, and municipalities could save money by issuing green rather than ordinary bonds.
This is important for municipal bond issuers because investors may be willing to accept lower returns in order to hold bonds identified as socially responsible. After controlling for such bond features as size, maturity, rating, and use of proceeds, they find that yields at issue on green bonds are around 0.06 percentage points lower than those on ordinary bonds. This suggests that a subset of investors are willing to give up returns in order to hold green bonds, and that municipalities could save money by issuing green rather than ordinary bonds. The effect is much stronger for the 6.6 percent of green bonds that go through a costly external certification process and are registered with the Climate Bonds Initiative. Therefore, the authors say, green bond issuers might benefit from getting their bonds certified, particularly if certification becomes more standardized and affordable as the market expands. The authors also find that investment funds whose names indicate that they are socially responsible hold 13.5 percent of outstanding green bonds, but just 0.6 percent of ordinary bonds. The ownership of green bonds, particularly small, AAA-rated ones, is more concentrated than the ownership of similar ordinary bonds. The authors argue that as the impact of climate change becomes more apparent, green bonds will likely become an important way to fund the response, and one that municipalities should embrace as a cheaper alternative to issuing ordinary bonds.