Shades of Green in the Bond Market: The Role of External Verification Reports

Synopsis Research problem We examined the role of external verification and assurance as credibility-enhancing mechanisms provided voluntarily by green bond issuers. Motivation Research on green bonds has focused mainly on bond yield differentials, with mixed results challenging early evidence that bondholders sacrifice financial returns for environmental benefits. However, the external verification and assurance of green bonds and related market effects are underexplored. Our study addresses this issue and contributes to the policy debate on the current market-based governance of green bonds, examining how credibility-enhancing mechanisms can strengthen market confidence and yield economic benefits. Test hypotheses We examined the market reactions to green bond issuance in the context of verification and assurance throughout the bond lifecycle. Our first hypothesis is that first-time green bond issuances accompanied by an external verification report are associated with higher market reactions. Second, green bond issuances that are backed by a verification report with an assurance statement are associated with more positive market reactions. Last, green bonds with postissuance verification are associated with higher market reactions. Target population This paper is useful for (a) companies issuing green bonds, (b) policymakers examining the role of external verification and assurance in signaling firm commitment to low-carbon projects, and (c) researchers studying the evolution of the green bond market. Methodology We investigated an international sample of 774 green bonds issued by listed non-financial companies from 2013 to 2021. We measured the market reaction to the announcement of these securities and analyzed the association between the use of credibility-enhancing mechanisms and abnormal returns. Analysis Consistent with signaling theory, we argue that the use of green bond verification is part of the issuer’s business strategy to convey a signal to the market regarding its commitment to using bond proceeds for low-carbon, climate-friendly projects. Our results provide evidence of the importance of third-party verification and assurance of non-financial information in the green bond setting. Findings Our findings indicate that green bonds accompanied by third-party verification reports attract a positive cumulative abnormal return of 0.30% over a three-day event window. We offer early evidence of the economic benefits associated with the assurance of green bonds issued by non-green firms (high CO 2 emitters).