ESG Performance, Green Bonds, and Yield Spreads - an empirical study of the Norwegian corporate bond market

Abstract

This paper seeks to study the relationship between environmental, social, and governance (ESG) performance, green bonds, and yield spreads in the Norwegian corporate bond market. By imposing a clustering model with fixed effects and a linear mixed effect model, we intend to answer whether ESG performance and sustainability, proxied through ESG ratings and green bonds, impact corporate yield spreads, following the belief that ESG- and sustainabilitylinked risks are financially material. The analyses utilize Nordic Bond Pricing’s historical bond price data, paired with a database consisting of ESG ratings, company-specific financials, and bond characteristics. Our results suggest that aggregated ESG performance is unrelated to yield spreads, while higher individual pillar performance is penalized with higher yield spreads in the Norwegian secondary bond market. On the other hand, green bonds appear to trade at lower yield spreads compared to their non-green counterparties, but poor data quality is believed to contaminate the results, rendering the results questionable.