For organizations seeking to finance sustainability initiatives, green bonds have become an increasingly popular tool. These bonds differ from traditional ones by requiring issuers to use proceeds for projects with measurable environmental benefits, such as renewable energy or clean transportation. Issuers often engage third-party monitors to certify that funds are used as promised, providing assurance to investors interested in supporting green initiatives.
A recent study led by Sang Baum Kang, Associate Professor of Finance at Illinois Tech’s Stuart School of Business, examines whether green bonds provide financial advantages to issuers. The research, titled “Green Dreams, Risky Assets? A Study of High-Yield Green Bonds,” appears in the Global Finance Journal and focuses on high-yield green bonds—those rated below investment grade, with credit ratings of BB++ or lower.
Kang’s co-authors include Illinois Tech graduate Satwik Sinha and Associate Professor Jiyong Eom from the Korea Advanced Institute of Science and Technology. The team analyzed global corporate data from Bloomberg, comparing average credit spreads between matched pairs of green and traditional bonds. Credit spread refers to the difference in yield between a U.S. Treasury security and a corporate bond of similar maturity.
Kang explained, “A pricing advantage for issuers is possible, but not guaranteed. In our matched-pair analysis, high-yield green bonds had lower average credit spreads than comparable traditional bonds, but the differences were not statistically significant overall.”
He added, “Issuers should not rely on the green label alone to reduce funding costs. Our theoretical model indicates that credible use of proceeds, transparent reporting, and verifiable impact appear to be key in attracting investors who are willing to pay more for sustainability.”
For investors, Kang noted that high-yield green bonds sometimes offer slightly higher yields than investment-grade green bonds. “However, on average, we do not find evidence of a large or reliable pricing discount,” he said. “Investors should focus on credit fundamentals and treat any pricing advantage as modest at best.”
Despite these findings, green bonds continue to attract interest from environmentally conscious investors. Kang stated, “The market for high-yield green bonds has been steadily growing, and at times rapidly. For example, issuance surged in 2021 under low interest rates. Looking forward, growth will depend on macroeconomic conditions, investor demand, and, importantly, the credibility and measurement of environmental outcomes.”