Greenium, green policies and corporate ESG performance in China : a comprehensive examination

Abstract

With many more investors dedicating financial resources to factors behind ESG, it is natural green bonds are becoming popular and prominent. These bonds are essential to ESG investments, having an increasingly extended function in the financial development of China and indicating the country’s commitment to environmental friendly economies and sustainable development. China’s green bond market has grown significantly thanks to firm government support and active regulators’ actions. The Chinese government is intending to set a green system and improve environmental protection as symbolized by the following policies: the Green Bond Support Project Taxonomy (2015 Edition); the Green Industry Guidance Taxonomy (2019 Edition); Green Bond Support Project Taxonomy (2021 Edition); and China Green Bond Principles established in 2022. Such regulation increases the investment capital with the regulation and becomes the significant factor in Chinese green market development as well as making Chinese green market to be more comparable to the global standards. As a result, China has well situated itself to be, what can be referred to as, the advancing player in the global green finance system. The use of green bonds has pushed many innovative schemes related to environmental conservation, including growth of technology in renewable energy and construction of sustainable structures. This thesis conducts a thorough examination of Chinese green bond market, analyzing the policies and performance factors that shape its growth. In the first section, the paper explores whether there exists a green premium within China’s bond market. By utilizing data from the Wind database, which encompasses 4,017 green bonds issued from 2014 to 2023 alongside 62,432 conventional bonds, the study ensures comparability by aligning corporate and municipal green bonds with conventional counterparts based on maturity, issuance year, and issuer characteristics. Regression analysis reveals that green corporate bonds exhibit significantly lower issuance rates and yields in comparison to conventional bonds. This observation implies that the green label is correlated to reduced bond yields in green bond markets, thereby confirming the presence of a positive green premium consistent with prior studies. In the case of municipal bonds, although unmatched data reveals that green bonds possess lower coupon rates and yields compared to conventional bonds, the green premium becomes negligible when matched data is employed. To account for bond liquidity, the study further computes daily and monthly green premiums at the market level, with results corroborating findings at the individual bond level. In the second section, using the same dataset, the performance of green bonds in the Chinese green bond markets is evaluated in this thesis, which also examines the relationship between different green policies, focusing on parameters such as issuance coupon rates, yield spreads, and trading volumes. The analysis primarily scrutinizes the influence of the draft Green Bond Support Project Taxonomy (2020 Edition) (Taxonomy2020) on green bond market performance. A difference-in-difference (DID) model is utilized to evaluate these impacts. Following the introduction of Taxonomy2020, a notable decline in green bond trading volumes was observed, particularly within the energy sector, while municipal green bonds exhibited no significant performance alterations. In contrast, the materials sector saw an uptick in trading activity. Concerning yields, regression analysis showed that corporate green bond yields increased after Taxonomy2020 was implemented, thereby diminishing the green premium (narrowing the yield spread). Municipal green bonds also experienced a rise in yields post-policy. Additionally, leveraging data from the China Public Policy and Green Development Database (CPPGD), which includes both substantive green bonds (those not officially labeled but utilized for green projects) and labeled green bonds (formally certified), the study investigated the relationship between green labeling and bond performance. In the primary market, labeled green bonds were associated with lower issuance rates. In the secondary market, labeled bonds demonstrated higher trading volumes and liquidity, although these findings did not maintain statistical significance after adjusting for other variables in the regression analysis. Thirdly, I look into how green bond issuance affects companies' ESG performance, this thesis gathers ESG ratings data from two sources, Huazheng and Wind, and integrates this information with the financial metrics of publicly listed companies. The regression analysis reveals that green bond issuance substantially enhances firms’ overall ESG performance. To tackle potential endogeneity, the proportion of green credits in the firms’ operational regions is employed as an instrumental variable for further analysis, and the empirical results affirm the same conclusion. Specifically, the issuance of green bonds significantly boosts firms’ scores in environmental and social dimensions, although no statistically significant effect is noted in the governance aspect. Several potential mechanisms could elucidate these findings. Firstly, firms like to issue green bonds to pose a positive role to the market, potentially elevating a firm’s ESG ratings. Secondly, the requirement for third-party verification and periodic reporting associated with green bonds enhances a company’s credibility and transparency. Thirdly, the issuance of green bonds can foster stakeholder engagement and promote more responsible corporate governance, ultimately improving management efficiency. In summary, the findings of this study significantly enhance the knowledgement of green investment and its contribution to sustainable economic growth. This research also provides valuable insights for policymakers engaged in formulating environmental regulations and green finance initiatives in China, while advancing theoretical perspectives on the role of green bonds as instruments for promoting environmental sustainability.