Climate change increasingly affects our economic environment, not only through physical threats such as extreme weather events but also via regulatory pressure and technological advances that reshape competition. As a result, climate risks, which include both physical and transition risks, have gained significant importance in financial markets (e.g., Krueger et al., 2020; Bolton and Kacperczyk, 2021). However, markets suffer from information asymmetries regarding firms’ exposure to these risks (Ilhan et al., 2023), which can result in adverse selection and inefficient capital allocation.
Green Bonds as a Commitment Tool
Seminal works such as Leland and Pyle (1977) or Myers and Majluf (1984) show theoretically that financing options for firms are affected by adverse selection and point to the financing choice as a signal of private information. This idea can be extended to green bonds, which are debt instruments that tie capital to sustainable projects. These projects are typically subject to specific standards aligned with environmental objectives, and issuers are required to provide ongoing reporting and third-party verification. Increased media coverage of an issuer’s environmental performance further adds reputational pressure to maintain the commitment (Lu, 2025). Therefore, green bonds can be viewed as a signal for the issuer’s commitment to sustainability (Flammer, 2021), particularly by signaling a reduced climate risk exposure for the assets underlying the green bond. Empirical evidence suggests their effectiveness: green bond issuance is associated with improvements in environmental performance, particularly among non-financial firms (e.g., Flammer, 2021; Lu, 2025).
However, the literature remains inconclusive on whether markets view green bonds as informative signals. In bond markets, research has mainly focused on the green bond premium (e.g., Zerbib, 2019), the yield spread between green and conventional bonds, which primarily captures investor preferences and does not directly test for a signaling mechanism. In stock markets, event studies have documented positive impacts of green bond announcements on equity valuations (e.g., Flammer, 2021), though more recent work suggests that these effects are less significant over shorter event windows and are driven by specific issuers with frequent green bond issuances (e.g., Aswani and Rajgopal, 2025; Lam and Wurgler, 2024). The literature has generally not benchmarked these effects against standard effects of debt announcements, which can affect both equity and bonds and may vary across issuers (Eckbo et al., 2007). Schneider (2025) introduces a novel identification strategy that allows the estimation of the incremental impact of green bonds on both debt and equity and assesses whether they mitigate climate risk information asymmetries through a signaling channel.
How Markets View Green Bonds as Signals
The empirical analysis in Schneider (2025) consists of two steps. First, it estimates the impact of a green bond announcement on the issuer’s outstanding bonds and equity, using a prior matched conventional bond announcement by the same issuer as a benchmark. Bonds are matched on characteristics such as size, residual maturity, and seniority, and robustness tests confirm that the results are not driven by changes in issuer characteristics or market conditions. The sample is restricted to events with no other close bond announcements, mitigating potential bias from overlapping windows caused by frequent issuers. This triple difference approach allows the estimation of the incremental impact of green bonds while controlling for standard effects of debt announcements.
The results reveal a consistent pattern: after green bond announcements, equity valuations rise and yields on outstanding bonds fall, relative to matched conventional bond announcements. Yield effects are strongest at longer maturities, consistent with the view that climate risks are expected to materialize over the long term and that green bonds reveal climate-related information. The effects are concentrated among non-financial firms, in line with the existing evidence of their commitment’s credibility. By contrast, financial firms show no significant effects, likely due to credibility concerns: banks can easily reallocate green loans after the bond’s maturity, making their commitments less binding, whereas non-financial firms typically invest in physical assets. Finally, the effects are strongest for lower-rated firms, consistent with information asymmetries being more severe for riskier borrowers, making green bonds a particularly effective tool.
In the second step, the paper tests the signaling mechanism directly by analyzing whether firms’ climate risk sensitivity changes after green bond announcements. Sensitivity is proxied by the relationship between stock return volatility and climate concern shocks, estimated using the Media Climate Change Concern Index (Ardia et al., 2023). The idea is that higher volatility in response to shocks indicates investor uncertainty about the issuer’s exposure. After green bond announcements, issuers show a reduced sensitivity, whereas peer firms without green bonds show no change over the same period, consistent with green bonds revealing reduced climate risk exposure.
Conclusion
The evidence suggests that green bonds serve not only as financing instruments but also as signals of commitment that alleviate adverse selection around climate risks. Effects are strongest where climate risks are expected to materialize (long-term), where commitments are most credible (non-financial firms), and where information asymmetries are most severe (riskier firms). In doing so, green bonds incentivize commitments and enhance the capacity of financial markets to price climate risks.