In new research, Jitendra Aswani and Roberto Rigobon find that investments raised on sustainable bond markets force firms to make material changes to corporate structure and governance, pushing back on some criticisms that ESG investing is mere greenwashing.
According to one estimate, a monumental investment of $9.4 trillion per year is required for decarbonization efforts to realize United Nations net-zero ambitions by 2050. To achieve these goals, the public and private sector have established bond markets to raise money to invest in sustainable technology and production. Since 2022 sustainable debt issuance has reached $3.7 trillion, with corporate sustainable debt constituting approximately half of this amount.
Some critics of sustainable debt claim that these efforts often constitute greenwashing, where firms claim to institute material green policies but do not make any real changes to company strategy. These critics view sustainable debt as a publicity stunt on the part of firms and asset managers to give the impression of caring about climate change. In new research, Roberto Rigobon and I address some of these criticisms and study if raising money on green bond markets pushes companies to make any real changes to corporate structure and strategy.
Issuers of sustainable debt claim to restrict the use of funds to specific categories, such as energy efficiency, green building and infrastructure, agriculture, forestry, climate change adaptation/mitigation, waste management, clean water, and pollution control. To fulfil these requirements to raise funds on the green bond markets, corporations often need to change their organizational structure and governance. These changes are necessary to develop and implement green projects and the management of sustainable investments, set up net-zero goals, achieve sustainability key performance indicators (KPIs) such as a specific reduction in greenhouse gas emissions, and communicate with the investors about the firm’s green practices. In principle these firms often need to hire a chief sustainability officer (CSO) and form an ESG/sustainability committee to oversee sustainable governance practices.
For instance, DuPont became the first American public company to hire a CSO in 2012 when it hired Linda Fischer, an ex-deputy administrator for the Environmental Protection Agency. DuPont’s reputation as an environmental villain emitting toxic chemicals made many sceptical of the Fisher hire. Yet, she played a significant role in the reduction of the firm’s emissions and suggested new business opportunities through innovations in sustainable materials and processes, such as producing ethanol from plant waste and reducing the volatile organic compounds in paints.
Following Dupont’s example, many publicly listed companies around the world have appointed CSOs to enhance sustainability practices within their organizations. Besides hiring a CSO, establishing an ESG committee has become a common approach to fostering a sustainability culture in these firms. A survey by Mattison Public Relations found that 54% of the Financial Times Stock Exchange (FTSE) 100 companies have a board-level committee dedicated to ESG issues.
Our research takes this survey several degrees further to systematically understand the extent to which firms reorient themselves around green strategies in response to sustainable investments. To conduct this analysis, we collected data on 3,944 sustainable bonds issued by globally listed firms between 2013 and 2022 from the Bloomberg Global Fixed Income database. Approximately 77.5% of these bonds are classified as green bonds, while the remainder falls into categories such as sustainability bonds, sustainability-linked bonds, or similar classifications that vary by the range of activities and KPIs to which the raised money can or must be committed.
Data on sustainability governance metrics—such as hiring a CSO or establishing an ESG committee—were obtained from the BoardEx database. We aggregated these observations at the firm level, resulting in a final dataset that includes 6,925 firms and 59,019 firm-year observations. Of these, 30% (or 3,053 firms) have made significant organizational changes to enhance their sustainability efforts during the observed period.
We measure sustainable investment by calculating the ratio of cumulative sustainable debt to the firm’s total debt, while we define sustainable governance using a binary variable that assigns a value of 1 to firms appointing a sustainability officer or establishing a sustainability committee within the year, and 0 otherwise. We externally validate these measures using different proxies of sustainable investment and sustainable governance.
We find that a 1% increase in the amount of sustainable debt (in total debt issued) improves sustainable governance by 9%. Results suggest that sustainable debt issuances do force firms to adopt sustainable governance. Robustness checks confirm that investment leads to improvements in governance, though the vector of causality can run the other way in a virtuous cycle of sustainability.
Our findings suggest that sustainable bond issuance encourages firms to implement sustainable governance practices. These initiatives can help companies monitor the progress of green projects, ensure successful implementation, manage proceeds from sustainable investments, and effectively communicate with investors about their green initiatives and sustainability efforts. Criticisms of greenwashing remain, but at least on one count ESG investments do create real corporate change.
Authors’ Disclosures: The authors reports no conflicts of interest. You can read our disclosure policy here.
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