Effects of ESG performance and sustainability disclosure on GSS bonds’ yields and spreads: A global analysis

This study investigates the effects of the issuer's environmental, social, and governance (ESG) performance on both the issue-specific yield and its spread vis-à-vis a sovereign comparable. A sample of 3,960 green, social, and sustainable (GSS) bonds issued in global capital markets was used for this purpose. The findings indicate a negative association between ESG performance and bond spreads, implying that a greater commitment to sustainable transition today is an effective strategy for a company to reduce the cost of debt for future projects. The study includes a two-stage procedure. First, the effect of “fundamentals” (e.g., credit rating) on issue pricing is determined; second, the residuals are regressed against the ESG performance. While the latter's risk-reducing power does not appear to differ based on the divide between advanced economies and emerging markets, we find that the real enabler of curbing the unexplained portion of risk is detailed disclosure of the use of proceeds. This is likely to minimize the likelihood of greenwashing.