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

Abstract

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 helps investors to identify green-unlabeled bonds, offering them more sustainable investment options in the market. Next, we investigate 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, we screen three bond categories: climate, sustainability, and ESG (Environmental, Social, and Corporate Governance). Using the generalized least squares regression models and daily data of 7250 bonds in 83 countries and entities from 2012 to 2021, we compare 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. We expand the screening categories to identify green-unlabeled bonds, including climate, sustainability, and ESG bond categories, to form the Sustainable Bond group. Our findings show the existence of 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.-