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Green Bond Legitimacy

4.3 Institutional Theory

4.3.1 Green Bond Legitimacy

Greenwashing is often placed in juxtaposition to the legitimacy of green bonds in terms of enabling positive environmental impact. Due to examples of fossil fuel companies and other high emitters issuing questionable green bonds in terms of legitimacy of the ‘green-ness’ of their use of proceeds, one must be vigilant of greenwashing particularly in high-emitting industries in the energy sector. As highlighted before, the key material factor in greening this sector entails greenhouse gas emissions reduction. While closely tied with signalling theory, the legitimacy of green bonds through the lens of institutional theory will be the focus of this section. This study argues that a transparent and legitimate green bond market is a prerequisite for any ability to effectively direct capital towards a green energy transition.

Marquis et al. (2015) notes that organisations may respond to new institutional demands, whether these be informal institutions (societal values, norms) or formal institutions (regu-lation, legis(regu-lation, frameworks), by selectively disclosing positive impact and thereby giving

Copenhagen Business School Master Thesis 15 Sept 2021

the impression of better environmental performance while hiding the actual performance.

Additionally, by looking at different markets with differing institutional frameworks, these contexts allows for better analysis of organisational behaviour as a result of normative and regulative institutions (Marquis, n.d.). Institutional pressures such as civil society as well as governmental efforts therefore act as deterrents for green bond issuers who do not intend to improve their environmental performance post-issuance. Importantly, the green bond characteristic of the use of proceeds clause provides a potent tool in the fight against issuance merely being symbolic.

Berrone et al. (2017) incorporates signalling and institutional theory, and analyses the impact of environmental actions as a means to gain environmental legitimacy. The study finds that environmental legitimacy can only be obtained by an organisation if environ-mental performance improves after an environenviron-mental action, such as issuing a green bond.

In the case our this thesis study the issuance of a green bond is the environmental action.

Additionally, pressure from nongovernmental organisations act as enforcers of institutional frameworks that guide ‘the rules of the game’ and that pressure corporates to adopt regu-lative and normative structures. Thus, third-party verifiers fulfil the role of enforcing the use of proceeds clause of green bonds, making it difficult for issuers to engage in green-washing while giving the green bond social legitimacy and decreasing the likelihood of scaring away investor capital into the financing tool (Berrone, 2017).

Delmas et al.(2011) defines greenwashing as misleading consumers of a green product about its environmental performance or environmental benefits. Factors that lead to di-minished legitimacy and increasing the likelihood of greenwashing related to green bonds, this study points to drivers of greenwashing as being poor or weak regulation (Delmas, 2011). Formal institutions are thus equally, if not more important than informal institu-tions of civil society. A study by Weber et al. (2020) confirms the view of institutional theory stating that formal institutions are often weaker in developing and emerging mar-kets. By using the example of the emerging green bond market in the India the study shows that in instances where formal institutions fail or are uncertain, institutional pres-sure will emanate from informal ‘invisible’ social norms demanding climate action (Weber, 2020). Lashitew (2021) however, highlights the importance of formal institutions such as EU regulation in driving transparency in environmental impact reporting, and in extension green bond legitimacy. Investment decision-making by investors and stakeholders will be adversely affected by non-transparent disclosure and information asymmetry (Lashitew, 2021). Through a study of the Swedish green bond market, Maltais (2019) provides

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sight into the role of green bonds in facilitating and developing sustainable financing on a much broader scale, with green bonds representing an innovation that will drive the overall green finance market and thereby indirectly enable a green energy transition also.

Additionally, the effectiveness of green bonds in attracting institutional investors towards financing green energy infrastructure projects is a result of improvements in the liquidity of infrastructure assets. In fact, investors are incentivised to engage with sustainable finance and direct investment towards green assets, away from brown assets, out of self-interest that would arise in the long run due to economic un-sustainability (Maltais, 2019).

Chapter 5

Methodology

5.1 Research Method Road-map

The following section explains the plan and research strategy intended to achieve the goal of this thesis.

Firstly, the research question that this thesis seeks to answer is presented:

Are green bonds an effective tool in enabling the green energy transition?

Section 2.2 unveils the inherent qualities of green bonds, presents the reasons for their emergence, and explains what characterises their use of proceeds. As stated before, the thesis exclusively examines the energy sector and the effectiveness of corporate green bonds with this industry sector in mind. Additionally, the effectiveness should be understood in the context of enabling the energy transition.

Hereafter, the section presents the thesis’ interpretation of the research question to delimit the thesis’s scope. Indeed, the issue that arises from such a research question is not trivial, i.e., how to measure the contribution of the event of issuing a green bond in the green energy transition context. The paper focuses on two areas of investigation related to the issuance of a green bond, i.e., the pricing of energy sector green bonds at issuance and the post-issuance firm-level performances of such bond issuers.

Milestones of the Methodology Roadmap

The initial milestone achieved is the isolation of energy sector corporate green bonds in the data set used for quantitative analysis. Despite numerous other constraints faced when collecting the sample, it is worth highlighting that we were able to isolate green bonds

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issued by energy firms in order to best suit our research topic and address our research question in the most effective way.

To perform the data collection, a list of SIC codes - exclusively related to the energy sector, was collected and subsequently matched to the raw corporate green bond data. Such a list includes more than 32 SIC codes (see 10.1), and among those, the following are the most important energy sector classes, e.g., oil and gas extraction, coal mining and electricity generation facilities, and electric services. This thesis therefore presents a unique view on the analysis of the corporate green market debt by focusing on the energy sector as well as the green energy transition. These features make the thesis specified in nature and method. Furthermore, the selection and extraction of the data sample included other specific constraints which will be explained in detail in section 6.1.

Another major phase in the investigation roadmap was the specification of the matching method (see 5.3). This method was fundamental in conducting the analyses. Indeed, if a valid and reliable control group was not selected, all the quantitative analyses would not have been possible. The matching method varies depending on the given subject of the analysis, e.g., when the subject is the bond, the set of covariates used in the matching process related to the bond characteristics. On the other hand, when the subject is the firm, namely, the bond issuers, the set of covariates relates to firm-level dimensions, e.g., company size, company debt, or company profitability.

After the matching phase, the actual data analysis was performed. The most urgent matter that the thesis needed to unravel was whether there is a greenium in the primary bond market for energy green bonds, compared to the energy vanilla bonds 1. Besides comparing the average yield of green and vanilla fixed income instruments, such a topic has also been discussed within the industry experts’ interviews (see 10.1). Therefore, by means of literature review, quantitative, and qualitative analysis, the discussion section sheds light on whether there is a greenium in the corporate green bond market in the context of the energy industry.

Finally, the investigation focuses on the firm-level performances, both from the environ-mental and ownership structure 2 perspectives. In this case, the usage of an effective

1Plain vanilla is the most basic or standard version of a financial instrument, usually options, bonds, futures, and swaps. It is the opposite of an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security CITE.

2Cyrus Tarapovela, president and CEO of State Street Global Advisor, said:” ESG issues have become much more important for us as long term investors”. (Eccles & Klimenko, 2019)

Copenhagen Business School Master Thesis 15 Sept 2021

matching method has been essential in seeking a statistically significant effect between the issuance of a corporate green bond and the post-issue performances. Without such a method, it would not have been possible to compare the results between the treated (green) and the control (vanilla) bond. Furthermore, the differences-in-differences statis-tical framework offers the chance to possibly capture the causal effect of the independent on the dependent variables, excluding the change that the dependent variables would have had anyway. Moreover, the multivariate linear regression served as a reliable instrument to calculate such casual effects, once its assumptions were ascertained true. Once again, using a combination of literature review, and quantitative analysis, the final paragraphs answer whether green bond issuers achieved better results than vanilla bond issuers in the post-issuance period in terms of environmental performance and ownership structure.