Doing Well While Doing Good: The Elusive Quest for Green Bond Returns

Abstract

In order to facilitate the transition to a low-emissions economic growth model, a burgeoning new “green finance” market has developed, providing ample opportunities for increasingly sustainability-focused investors. Using data for US and euro investment-grade corporate bond universes, this article seeks to analyze and quantify the investment relevance of green bond labels. The available empirical evidence points to three tentative conclusions: (i) labeled bonds tend to trade with slightly tighter spreads than conventional counterparts; however, this turns out not to matter for explaining total returns once typical measures of systematic credit risk are taken into account; (ii) contrary to common assertions, green bonds overall did not weather the COVID-induced sell-off in March 2020 significantly better than nongreen peers, and differences in performance between select green indexes and wider market benchmarks are largely attributable to compositional effects; (iii) EUR and USD green bond portfolios can be optimized to match the risk profiles of broad market benchmarks, while outperforming them in risk-adjusted terms.