Investors in the $4 trillion U.S. municipal bond market are paying more for bonds with credible environmental, social, and governance information, even when those bonds are not officially labeled as “green” or “social.”
That is the key finding of a new study into the green bonds market, co-authored by Wharton finance professor Daniel Garrett, Penn PhD student Mahdi Shahrabi, and Oregon State University professor Brian Gibbons. It shows that municipal bonds with third-party ESG scores trade at higher prices, signaling cheaper borrowing costs for issuers. On average, yields — which move inversely to prices — dropped by 3 to 4 basis points when a bond received an ESG score, even if it had no formal label.
An ESG score is a third-party assessment of a bond’s environmental, social, or governance features. A label, by contrast, is a formal designation — like “green bond” — from the issuer that requires meeting strict international criteria.
The distinction matters. The researchers estimate that, between March and December 2023, investors were willing to pay about $1.3 billion more in total for bonds that received ESG scores, based on observed price changes following the public release of the data. Most of that — about two-thirds — went to bonds that were not eligible for any official label.
“The takeaway is clear: The market values ESG information. Issuers who ignore it can leave money on the table,” said Garrett.
“The takeaway is clear: The market values ESG information.”— Daniel Garrett
How ESG Scores Boost Bond Value
Municipal bonds are loans to local governments and public agencies, used to finance schools, roads, water systems, and other public services. The study examined what happened when, in March 2023, Bloomberg Terminals began displaying ESG scores for roughly one-quarter of the U.S. municipal bond market — about $1 trillion in debt — making them visible to a broader set of investors. These terminals are ubiquitous in investment and trading.
The ESG scores came from Kestrel, a private company, and were displayed on Bloomberg whether or not the bond was officially labeled as green or social. In total, Kestrel has scored about 125,000 bonds worth $1.8 trillion, which formed the basis of the analysis.
The central finding was simple: Bond prices went up once they received an ESG score. Bonds with stronger environmental or transparency ratings saw a slightly bigger bump — a “greenium” of about 1 to 2 basis points, reflecting the extra premium investors place on higher ESG quality.
By contrast, there was no premium for bonds with high social scores, underscoring that investors placed more value on new environmental and governance information.
The larger boost was what the researchers call the “assessment effect” — a 3 to 4 basis point drop in yields for any bond that received a score, regardless of how high or low it rated. And most of that gain, worth about $870 million, went to bonds that did not qualify for any official ESG label.
Garrett said: “Investors are pricing this information regardless of labels. Once the scores were published, bonds with stronger ratings improved more in value, while those with weaker gained less.”
The price premium was especially large for riskier bonds: Yields fell by about 9 basis points for those with weaker credit ratings, and by as much as 10 basis points for other riskier bonds, such as those backed by income from specific projects like toll roads or water systems, rather than by broad tax revenues.
Garrett said this shows ESG scores can complement traditional credit ratings. “Credit rating agencies are trying to predict default,” he said. “We’re not saying they are wrong, but there can be other sources of risk that credit ratings alone do not capture.”
“Once the [ESG] scores were published, bonds with stronger ratings improved more in value, while those with weaker gained less.”— Daniel Garrett
Why Issuers Aren’t Labeling Municipal Bonds
That left the question of who was driving the demand for bonds labeled as “green” or “social.” One possible explanation was demand from mutual funds with explicit objectives to invest in these types of financial instruments. But green funds made up less than 0.5% of the market, holding only about $1 billion in labeled bonds before the new scores were released — not enough to explain the full effect. The bulk of labeled debt was held by mainstream funds, suggesting that the price changes came mainly from ordinary investors.
Yet despite this clear demand, most municipal bonds are still issued without ESG information. The question is why, and the researchers point to politics and demographics. Even when a project qualifies, issuers in Republican-leaning areas were less likely to use one. A 16% increase in Republican vote share cut the likelihood of labeling by about 9 percentage points.
By contrast, more concern about climate change raised the odds of labeling by about 12 percentage points. In places with more Hispanic or nonwhite residents, labeling was 7 to 12 percentage points less likely, though the study does not explain why.
Cost is another barrier. To get a green label, issuers need the staff and expertise to certify that a project qualifies, and it is common to hire an outside firm for a second opinion. These reviews usually cost several thousand dollars — sometimes tens of thousands. Such costs barely register on a $100 million bond but might be more relevant on a $5 million issue.
“Municipal bonds are often issued by local school districts,” said Garrett. “Those officials may not be financially sophisticated or equipped to assess their ESG impact.”
That lack of expertise can be costly. Even a small drop in yields — just 3 basis points on a $100 million bond — translates into roughly $120,000 in present value savings. Municipalities that provide credible ESG information can capture those savings, even if they never apply for a formal label.
As Garrett puts it, “Our estimates suggest it would pass cost-benefit muster for most borrowers to go to an agency and ask them to describe those risks to investors.”
ESG information is already influencing bond prices, regardless of whether issuers provide it. The question is whether issuers will take control of the story, or keep leaving money on the table.
