The Green Bonds Premium Puzzle: The Role of Issuer Characteristics and Third-Party Verification

If we examine the characteristics of a sample of green bonds matched with their closest brown bond neighbors, we encounter a challenge. Green bonds have higher yields, lower variance, and are more liquid. The institutional/private issuer and the green third-party verification/non-verification breakdowns help explain this puzzle. Green bonds from institutional issuers have higher liquidity with respect to their brown bond correspondents and negative premia before correcting for their lower volatility. Green bonds from private issuers have much less favorable characteristics in terms of liquidity and volatility but have positive premia with respect to their brown correspondents, unless the private issuer commits to certify the greenness of the bond. An implication of our findings is that the issuer's reputation or green third-party verifications are essential to reduce informational asymmetries, avoid suspicion of green (bond)-washing, and produce relatively more convenient financing conditions.