Understanding the Rapid Growth of the ESG Bonds Issued by Japanese Companies: Commitment vs. greenwashing

This paper examines the background contributing to the rapid growth of the ESG bond market in Japan by evaluating the validity of two opposing hypotheses: the signaling hypothesis and the greenwashing hypothesis. This study evaluates the validity of various types of ESG bonds issued from 2018 to 2023, with a particular focus on green bonds, which account for 55% of the total issuance. The findings suggest that (1) the issuance of these green bonds is primarily based on companies' commitments to environmental improvement, (2) the equity market reacts positively to this, (3) this is interpreted as resulting from a decrease in the cost of capital (WACC) supported by evaluations in the bond market (Greenium) and an increase in holdings by institutional investors with non-pecuniary motivation for ESG investment, and (4) improvements in environmental performance in terms of ESG scores and CO₂ emissions are observed after the issuance. These results are consistent with the signaling hypothesis. On the other hand, for sustainability-linked bonds, clear results supporting the signaling hypothesis were not obtained, suggesting that the possibility of greenwashing cannot be ruled out at this point.