Empirical comparative analysis of the performance of European Union conventional and ESG bonds

Abstract

In recent years, the European Commission (EC) has taken a leading role in promoting sustainable finance through the issuance of ESG-labelled debt. The Next Generation EU (NGEU) and EU 2020/672 (SURE) programs—designed to foster post-pandemic recovery, environmental transition, and social protection—are financed through green and social bonds issued by the European Union (EU). This study examines whether these ESG bonds differ in yield from conventional EU bonds in the secondary market, applying a two-way fixed-effects (TWFE) model over both one- and two-year periods. The results reveal the presence of significant bond-specific and time effects, reflecting the influence of market conditions across issuances. No consistent ESG yield premium is identified; instead, yield differentials are primarily explained by liquidity conditions, which remain statistically significant across both the baseline and extended samples. Differences in liquidity between ESG and conventional bonds are statistically indistinguishable, whereas ESG bonds exhibit lower volatility, although the explanatory power of volatility diminishes when the analysis is extended to the two-year period. Overall, pricing differentials in EU-issued bonds are driven by market-liquidity dynamics rather than the ESG label itself.