The financial benefits of going green: an analysis of bank performance and policy impact in China

Purpose - This paper aims to examine whether a green premium exists in the banking industry in Chinese financial market and then further explores the impact of the 2019 policy revision on the green premium. Additionally, this study explores whether and how the 2019 policy revision affected the performance as measured by net interest spreads and profitability of banks that subsequently issued green bonds. Design/methodology/approach - This study utilizes data on green bonds issued by banks in the Chinese market to illustrate that green bond benefit from lower coupon rates by using OLS method, attributable to investors’ recognition of governmental support for such initiatives. The policy effect is analyzed by the difference-in-difference method and the robustness checks using an amalgamated data set and propensity score matching techniques confirm the overall findings. Findings - Banks that issue green bonds pay lower coupon rates on those bonds and the 2019 policy revisions further decrease green bond coupons, thereby augmenting the net interest spreads of banks issuing green bonds and enhancing their profitability performance. A so-called “green premium” exists for banks in China that issue green bonds. These results underscore investors’ heightened confidence in banks showcasing loan policies supportive of the green industry, reflecting an increased emphasis on sustainability considerations. Originality/value - Most of the current green bond and sustainability studies focus on the manufacturing sector; this paper sheds light on the under-discussed support from financial institutions. Unlike other traditional financial institutional research focusing on market power and bank-firm relations, this paper investigates the policy effects, which are especially interesting in the context of Chinese financial market, since most of the financial institutions are state-owned enterprises (SOEs).