Environmental risk perception and green bond pricing: evidence from natural disasters
Green bonds are debt securities whose proceeds are used for environmentally friendly purposes. It is a fast growing market with more than $500bn capital raised in 2021. We study how investors’ environmental risk perception affects green bond pricing. To assess causality, we focus on exogenous shocks induced by the occurrence of natural disasters. We use a sample of 781 green bond emissions matched with comparable brown bonds. The evidence shows that the price of green bonds increases relative to that of comparable brown bonds following a natural disaster, both at
bond issuance and in the secondary market. Also, the severity of the disaster explains the magnitude of the price increase, as disasters affecting a larger number of people result in a greater increase in price. This price increase is temporary, as green bond prices revert to pre-disaster levels after a few months. Overall, the evidence is consistent with a temporary overreaction by investors in terms of perceived environmental risk.
The paper is co-authored with Silvia Rigamonti and Andrea Signori.
- Marco Tomasi, PhD student in Susteems