Green Certification and Liquidity Risk

Büber G. , Danışoğlu S.

International Social Innovation Research Conference, Sheffield, United Kingdom, 1 - 03 September 2020

  • Publication Type: Conference Paper / Unpublished
  • City: Sheffield
  • Country: United Kingdom


Green bonds went from an esoteric instrument that caught the interest of a few supranational institutions in the late-2000s to a popular debt instrument issued by governments, supranationals and corporations alike, with a market value of $258 billion and 17% of the bond market volume by the end of 2019. What differentiates a green bond from its conventional counterpart is the strict requirement regarding the use of proceeds. A green bond’s issuer is assumed to commit to using the proceeds for only environment-friendly investments. The “green” designation for a bond is often the result of self-labelling, and, in a small but steadily increasing percentage of the issues, this designation is given by a third-party organization such as the Climate Bonds Initiative[1], Sustainalytics[2], and CICERO[3].

One critical issue is whether the risk-return performance of a bond changes when it is “green certified” by one of these organizations. Without certification, the informational asymmetry that exists between the issuer and investor is even higher with certification especially affecting the market liquidity of the green bond. This paper contributes to the literature by examining the liquidity risk of certified versus non-certified USD-denominated corporate green bonds issued between 2013 and 2019. Febi, Schafer, Stephan and Sun (2018)[4] find that the impact of liquidity risk on the yield spread of green bonds is negligible. However, Febi et al. do not distinguish between certified and non-certified bonds. The main effect of certification is an improvement in the informational asymmetry. In a market where the term “green” has a broad definition, obtaining a certification with a clear set of requirements may make a green bond more attractive for investors.




[4] Febi, W., Schäfer, D., Stephan, A. and Sun, C., 2018. The impact of liquidity risk on the yield spread of green bonds. Finance Research Letters, 27, pp.53-59.