Market Reactions to Green Bond Standards in Europe
Summary
This study examines the market reactions to the European Green Bond Standard (EGBS), agreed upon in February 2023 to enhance transparency, comparability, and credibility in Europe’s green bond market. The EGBS aims to facilitate efficient and confident investments in sustainable projects by addressing information asymmetry and standardisation issues. This study evaluates the EGBS’ impact on investor sentiment, cost of capital, and market efficiency through regression analyses and event study methodology, focusing on changes in green bond yields, bid-ask spreads, and cumulative abnormal returns. The results indicate that the EGBS has significantly reduced green bond yields, suggesting improved investor confidence and perceived lower risk. Additionally, enhanced liquidity is observed through narrower bid-ask spreads. Positive cumulative abnormal returns following green bond issuance announcements post-EGBS agreement in the equity market reflect favourable investor sentiment towards firms adhering to the EGBS. Overall, the EGBS has successfully promoted greater market efficiency and investor confidence, offering valuable insights for policymakers, issuers, and investors in sustainable finance.