Daniel Garrett - Wharton School of Business, University of Pennsylvania

We study the supply and pricing dynamics of environmental, social and governance (ESG) labels in the context of municipal bonds. Most eligible bonds are issued without ESG labels.

Local beliefs, issuance terms and low creditworthiness are associated with less labeling conditional on eligibility. Using a difference-in-differences design, we provide within-bond evidence that reducing ESG-related uncertainty is valued by investors. We find a 3-4 basis point premium for assessed bonds regardless of label eligibility. The marginal greenium for higher environmental or transparency scores on assessed bonds is smaller but significant. Pricing effects are consistent across local characteristics and larger for revenue bonds with observable credit risk suggesting a mismatch between supply of and demand for ESG labels and information.