Sustainable debt financing—bonds issued to support projects that benefit the environment or social welfare—has skyrocketed over the past decade, rising from a niche market to a trillion-dollar business. Public finance has been an essential catalyst for the market for sustainable investments, but more important will be the development of private markets for sustainable debt. Indeed, many corporations have begun to issue green, social, sustainable, and sustainability-linked bonds. But this development raises a significant question: What motivates private companies to engage in sustainable finance?

In a new article, I seek to shed light on this question through a theoretical and empirical analysis. Corporations may have a variety of incentives, most of which are not mutually exclusive, for engaging in sustainable finance. For instance, corporate managers may seek to mitigate particular climate-related business risks, transition to a cheaper form of energy, or reduce the regulatory burdens or litigation risks associated with certain environmentally harmful practices. Corporations may also seek to brand themselves as green, sustainable, environmentally conscious, or socially conscious. Such efforts might be sincere or merely deceptive greenwashing.

Because some issuers have found eager markets for green and sustainability bonds, issuers may also enjoy a premium in the form of an interest rate paid to investors that is lower for green issuances than for standard bond issuances. This so-called “greenium” may reduce the issuer’s cost of capital, providing another financial motivation for sustainable finance.

Corporations may also face pressure from key stakeholders, including employees, to reduce the corporations’ environmental impact. And, increasingly, shareholders are pushing corporations on a wide variety of environmental, social, and governance (ESG) issues. But corporations may also shape their own investor base through sustainable financing. By issuing green and sustainability bonds, they may attract a broader range of investors, particularly those eager to support management efforts to reduce climate-related impacts from operations. Corporations using sustainable finance provide a signal to the market about a sustainable corporate purpose, thereby attracting ESG-focused equity investors and acclimating current equity investors to a more ESG-focused management tone, while also providing engagement opportunities with investors on ESG issues.

I use a hand-collected dataset of SEC-mandated public disclosures to evaluate these potential motivations. Issuer disclosure trends help reveal how corporations describe climate-related risks, how shareholder proposals pressure corporations to act on sustainability or social issues, and how corporations describe their green and sustainability bond issuances to shareholders.

My analysis shows that issuers have diverse, often overlapping incentives to engage in sustainable financing. For instance, some aim to address specific climate-related risks to their business, shift towards more cost-efficient energy solutions, or lessen the regulatory or legal challenges tied to environmentally detrimental activities. Others may seek to position themselves as environmentally and socially responsible, whether through genuine green-branding initiatives or greenwashing.

Issuer disclosures also reveal that, as expected, the corporate pursuit of sustainability is increasingly influenced by the demands of important stakeholders, such as employees, to mitigate environmental impacts and promote a variety of ESG matters. Engaging in sustainable finance sends a message to the market of the corporation’s commitment to sustainability, attracting ESG-focused equity investors, conditioning existing investors to a more ESG-conscious management approach, and creating opportunities to engage with investors about ESG concerns.

In my article, I draw several broad conclusions from the analysis of corporate sustainable finance disclosures. Issuers don’t seem to be focused on risk management through green and sustainability bond issuance, and no issuer disclosed a greenium, or the expectation that the company would receive a greenium, as a motivation for an issuance. Issuers do tend to provide significant disclosures about green commitments, however, in annual reports and proxy statements. The proxy statement, in particular, is designed to speak to shareholders about management’s vision for the company; for many green and sustainability bond issuers, the proxy statement provides an opportunity to describe management’s commitment to sustainability, and the issuance of a green bond or sustainability bond is sometimes part of that branding disclosure.

Worryingly, many firms that are among the most significant polluters, and thus stand to benefit most from transition financing through green bonds, do not take advantage of corporate sustainable finance opportunities. For some of these firms, perhaps, a decision not to engage in sustainable finance may also be part of the firms’ branding and marketing calculations. Ultimately, motivations other than risk mitigation seem to drive the use of corporate green and sustainability bonds.

While the article suggests that some skepticism of green bond issuance is warranted, it is also the case that many American issuers and their investors have lacked clear definitions from regulators to help evaluate climate-related disclosures and green commitments. Private standards, such as the Green Bond Principles, do not seem to provide adequate protection against greenwashing. Perhaps, then, as the SEC and other regulators develop, harmonize, and enforce sustainable finance standards, issuers will have greater incentive to engage in authentic sustainable finance initiatives and to avoid greenwashing.

This post comes to us from Professor Paul Rose, the dean of Case Western Reserve University School of Law. It is based on his forthcoming article, “Corporate Sustainable Finance,” forthcoming in the Journal of Law and Political Economy and available here.