Issuers reach for features when spreads are high as green and sustainability-linked bonds reduce borrowing costs

The authors examine when firms choose to issue green or sustainability-linked bonds (SLBs), and how these bonds are priced. The authors hypothesize that firms are likely to issue green bonds when credit spreads are high (“reaching for features”). Using data from 2019 to 2023 on corporate bond issues in US dollars, yen, and euros, the authors estimate a trivariate probit model and find evidence consistent with this hypothesis. Furthermore, higher emission firms are more likely to issue both green bonds and SLBs, while companies that do not disclose emissions are less likely to issue these bonds. The authors consider matching, OLS, and using a heteroskedasticity-based instrument to see how green and SLB securities are priced. Regression methods suggest sustainability-linked bond spreads were issued with 29–46 basis point lower spreads than regular bonds. Green bonds were also priced with lower spreads than regular bonds, although this difference is not always statistically significant.