Performance of sustainable investments: do green-labeled bonds outperform green-unlabeled bonds?

Purpose The increase in demand for sustainable investments globally raises the question of benefits of investing in green bonds. A green label attracts investors because it represents less information asymmetry on green bonds with lower potential environmental risks. However, not all bonds with green features are easily recognized and labeled, creating limited options for bond investors. This paper aims to help investors to identify green-unlabeled bonds, offering them more sustainable investment options in the market. Next, this paper investigates the performance of green-labeled and green-unlabeled bonds to identify which bond can serve as a safe-haven asset in different economic conditions. Design/methodology/approach To identify green-unlabeled bonds, this paper screens three bond categories: climate, sustainability and environmental, social and corporate governance (ESG). Using the generalized least squares regression models and daily data of 7,250 bonds in 83 countries and entities from 2012 to 2021, this paper compares the performance of green-labeled and green-unlabeled bonds between corporate and government bonds, high-income and lower-income economies and short-term and long-term periods. Findings The results show that green-labeled bonds underperform green-unlabeled counterparts in terms of bond liquidity and yield. For both green-labeled and green-unlabeled bonds, corporate bonds are less liquid than government bonds in the short term, but offer higher yield in the long term. Green-labeled and green-unlabeled bonds have short-term hedging potential in volatile market conditions. Regarding green-unlabeled bonds, financing climate-related activities via climate bonds is unattractive and risky during uncertain periods; but sustainability bonds are a safe-haven asset in the economic downturns. Originality/value This study timely contributes to the scarcity of studies on green-unlabeled bonds in the literature. This paper expands the screening categories to identify green-unlabeled bonds, including climate, sustainability and ESG bond categories, to form the sustainable bond group. The findings show the existence of the greenium effect between green-labeled and green-unlabeled bonds; provide valuable insights to investors, bond issuers and governments; and suggest that investors may add green-labeled bonds and green-unlabeled bonds in their portfolios to hedge downside risk, especially during extreme market conditions.