Written by: Siri Fjellvær and Signe K. Solstad Midtun, Master of Science in Economics and Business Administration at NHH.

Read the thesis here.

The Effect of Sustainability on Bond Pricing: An empirical study of bonds issued by Norwegian savings and commercial banks

In the fall of 2021, we wrote our master thesis, based on our common interest in sustainability and finance. We were unsure on how to angle our thesis, but in collaboration with NCE Finance Innovation, we ended up with a focus on banks and their issuance of bonds, both green and conventional. Our goal was to be able to give Norwegian banks concrete measures related to sustainability that they can apply to achieve a lower cost of debt while contributing to the green transition.

By gathering data from Bloomberg on bonds issued by 29 Norwegian banks, we analyzed whether sustainability-related bank characteristics and issuing green bonds have an effect on Norwegian banks’ cost of debt, represented by the bond coupon rate at issuance. Based on relevant literature we developed three hypotheses:

1. Being an early adopter of a sustainability strategy leads to a lower bond coupon rate at issuance

2. Having a better issuer ESG rating leads to a lower bond coupon rate at issuance

3. Savings banks attain a lower bond coupon rate at issuance compared to commercial banks on both green and conventional bonds

We used the banks’ green products as a proxy for a sustainability strategy and Sustainalytics’ rating as the ESG rating, where a low score indicates low environmental risk.

Through our analysis using standard and matched pairs OLS, we found that green bonds issued by Norwegian banks are on average issued at a 40 bps lower coupon rate than conventional bonds. Furthermore, we found that banks pay a 2 bps lower coupon rate when issuing conventional bonds for a better ESG score from Sustainalytics. Moreover, we found that savings banks pay on a 60 bps lower coupon rate compared to commercial banks when issuing conventional bonds. However, we found that banks pay on average a 10 bps higher coupon rate for each additional year since adopting a sustainability strategy when issuing conventional bonds.

Thus, our thesis gives evidence that sustainability has a causal effect on the coupon rate for conventional bonds issued by Norwegian banks. Overall, through our analysis, we see that the combination of sustainability-related characteristics with the issuance of green bonds is insignificant. Therefore, banks should direct their focus towards improving on these characteristics to benefit from a lower cost of debt when contributing to the green transition.

If you are interested in learning more about our findings you can connect with us on LinkedIn.

We want to take this opportunity to thank the Norwegian banks we interviewed and NCE Finance Innovations members that contributed with insights provided and their perspectives.