Firms issuing sustainability bonds signal their commitment to environmental and societal goals leading such firms to perform better than those that issue traditional bonds, research by Westminster researchers Dr Sudha Mathew and Dr Sheeja Sivaprasad has revealed.
In simple terms, the firm issues a corporate bond to raise capital from investors. A firm uses the proceeds raised from sustainability bond issuance for environmental and/or social purposes, aiming to impact sustainable development positively and contribute to a firm’s environmental, social and governance (ESG) goals. They differ from traditional bonds, which work similarly but do not have a green and/or positive social purpose. The study highlights that there has been an increase in demand for sustainability bonds, as organisations see the importance of financing projects or issues around environment and sustainability.
To research how sustainability bonds can benefit a business, the Westminster researchers used a global sample of corporate sustainability bond issuances. They examined how the market reacts to the announcement of sustainability bond issuances compared to traditional bond issuances by examining their impact on the firm’s share price. They then analysed how the market reacts to multiple sustainability bond issuances compared to a single issuance. Finally, they evaluated how ESG scores are the primary drivers for firm performance; this effect is more pronounced for firms issuing sustainability bonds.
Through their investigation, they found that through issuing sustainability bonds and prioritising green and social projects, firms show their commitment to sustainable development and their determination to help the planet positively, improving their ESG scores. This drive to make a positive impact can make a firm look more attractive to investors, leading to more economic support. As well as boosting a firm economically, it can also improve its reputation, transforming an organisation into a more desirable place not just to invest in but to work at and partner with.
This study contributes toward the United Nations’ Sustainable Development Goals (SDGs) adopted by the University of Westminster to help make the University a more sustainable, responsible and inclusive place to live, work and study. By revealing the benefits of sustainability bonds, companies may be encouraged to increase their use of them and will help an array of sustainable causes.
About the research Dr Sivaprasad said: “In the face of the increasing pressure on firms to undertake environmental and social initiatives, this research is timely and topical. The positive stock market reaction to corporate sustainability bond issuances is a global phenomenon. Sustainable bond issuances signal a firm's commitment to environmental and social initiatives and enhance its ESG scores, boosting firm performance.”
Read the full study on Wiley Online Library.
Find out more about Sustainable Development at the University of Westminster.
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