Do Green Equity issuers perform better than Green Bonds Issuers? A comparative analysis of environmental and financial performance. ?

Abstract

Investigative studies on the performance of green versus brown bonds and equity stocks and to a lesser extent, their connectedness and directional spillover effects has become a popular area of research. This has not been the case for green bonds versus green equities as global efforts are aimed at mobilizing the necessary finance through green instruments to fight climate change. In this study, we attempt to provide a response as to whether green equity stock issuers perform better than green bonds issuers through a comparative analysis of their environmental and financial performance within the U.S green finance market. Employing a Feasible Generalized Least Square Regression (FGLS) on a yearly Panel data of 62 green bonds issuing companies and 53 green equity stock issuing companies in the U.S from 2013 to 2024, our analysis revealed that, environmentally, green bonds issuers have better or improve on their environmental scores (ESG scores) than green equity issuing companies which is due to their heavy investments or capital expenditure on assets that enhance environmental sustainability. We further examine and compare their CO2 emissions, with our analysis documenting evidence of green bonds issuing companies emitting more CO2 emissions than green equity issuing firms. Though both group of companies show a positive relationship with CO2 emissions, green equity issuers are better in managing their CO2 emissions than green bonds issuers. However, after controlling for renewable energy produced and purchased as a proportion of total energy used, we find that green bonds issuing companies use more non-renewable energy sources and their research and development expenses did not accommodate sustainable practices leading high emissions. With regards to financial performance which we measure by stock price returns, we observe a negative relationship between both instruments and their stock price returns. Most especially, green bonds issuing companies show lower returns than green equity stock issuers. This is unexpected as we however justify this scenario by the preference-based theoretical model where green investors are willing to pay more to hold green firms, pushing the prices of the green assets up and consequently leading to lower expected returns. Furthermore, the high CO2 must have generated negative signals in the market leading low stock price returns. Our findings however suggest that green bonds and green equities boom and bust together and therefore policy makers should improve regulations to protect investors interest in green investments. Key words: Green bonds, Green equities, CO2 emissions, ESG scores, Stock price returns.