Concerns about greenwashing could increase the cost of financing the transition to a low-carbon economy, a new study by Saitama University in Japan has found.
According to the study, The large-scale investor ESG paradox and greenwashing penalty: Evidence from Japanese GX transition bonds, which was published in the International Review of Economics & Finance, larger investors are likely to demand higher returns from climate transition bonds, meaning that confidence in said bonds is a pre-requisite.
“The important question is not simply whether investors prefer environmentally friendly investments, but how much confidence they place in the promised transition,” commented Professor Kentaka Aruga of Saitama University’s Graduate School of Humanities and Social Sciences.
About the study
The study sought to examine how investors assess Japan’s GX transition bonds, which were introduced in 2024 as part of the country’s Green Transformation framework. Unlike conventional green bonds, which generally finance defined environmental projects, transition bonds are intended to help carbon-intensive industries move towards cleaner operations.
In undertaking the study, more than 640 financial professionals were surveyed to gauge how portfolio size, environmental preferences, liquidity concerns and perceptions of greenwashing affected the returns they would require from GX transition bonds.
The findings showed that environmental labels alone did not necessarily result in lower financing costs. The average additional yield demanded for GX transition bonds was close to zero, with differing investor preferences effectively offsetting one another.
However, investors who already held ESG-related bonds were willing to accept yields around 3.4 basis points lower, suggesting that demonstrated sustainable investment behaviour may be associated with more favourable financing conditions.
The researchers also identified what they described as an ‘ESG investment paradox’ among investors with larger portfolios. Those with financial assets of at least JPY 100 million who prioritised ESG criteria had a predicted required yield premium of 9.4 basis points compared with comparable conventional government bonds.
Greenwashing concerns presented a further differentiating factor. Investors with no concerns about greenwashing showed a predicted required yield discount of 10.8 basis points, while those with the strongest concerns demanded a premium of 4.8 basis points. The difference between the two groups was 15.6 basis points.
“Our findings suggest that there is no single financial advantage shared by all sustainable bonds,” Professor Aruga added.
“Investors differ in their portfolio sizes, investment behavior, and sensitivity to risk. Understanding these differences can help explain why environmental commitments alone may not be sufficient to secure favourable financing conditions.”
Investor behaviour
According to the researchers, the study highlights the importance of examining investor behaviour rather than assuming that sustainability labels automatically reduce borrowing costs.
“Over the next five to ten years, transition finance could play an increasingly important role in helping carbon-intensive industries adopt cleaner technologies,” Professor Aruga added.
“However, attracting the necessary investment will require more than ambitious environmental targets. Clear transition plans, independent verification, and transparent reporting of actual progress could help strengthen investor confidence and reduce uncertainty. If these measures lead to more favourable financing conditions, they could support industrial decarbonisation while helping governments and companies manage the economic costs of the transition.” Read more here and here.
