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Role of Green Bonds as a Financing Solution for Adapting to ESG Regulations and its Impact on Corporate Profitability

Year: 2025
Type: article
Abstract: Given the emerging dynamics of environmental, social and governance (ESG) regulations, the purpose of this paper is to explore the impact of green bond issuance on a firm’s financial performance and operational efficiency. Its main area of activity is the Asia-Pacific energy sector. The analysis is based on a quantitative approach that studies a panel of data of 149 firms during a 5-year period (2020–2024) and checks classic and green bond issuing companies. With the aid of fixed-effects examination and Difference-in-Differences (DiD) study, the linkages are investigated between green bond issuance, profitability (ROE) and efficiency of operation (Operating Cost Ratio) after adjusting for size of firm, firm leverage and ESG performance. According to the empirical results, issuing green bonds is substantially linked to a short-term decline in profitability, most likely as a result of upfront costs associated with capital investments that support environmental causes. However, as evidenced by lower operating cost ratios, green bond issuers demonstrate comparatively higher operational efficiency. The DiD results show no statistically significant long-term differences in the financial or operational performance of green bond issuers and non-issuers, despite these associations. Moreover, as ESG ratings may not always affect firm performance it appears that the reputational payoff on its own isn’t enough without real change occurring within the firm. To sum up, green bonds may not bring immediate financial returns, they are a helpful tool to support long-term sustainability transitions.
DOI: 10.47747/ijfr.v6i3.3045
Authors: Muhammad Rumi Alvito Riswanda, Tharisa Precilia, Catherine Tjajadi, Fitriya Fauzi
Language: English
Subfield: Finance
Open Access status: diamond
OpenAlex ID: W7090197406
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