Corporate Bond Market Reaction to the Mandatory ESG Disclosure Act: Is Sustainium Sustainable?

Abstract

We investigate the primary and secondary market reactions of US corporate bonds to the mandatory Environmental, Social, and Governance (ESG) Disclosure Act of 2021 (hereafter, the ESG Disclosure Act). We compare ESG bonds with non-ESG bonds through a yield spread analysis for the primary market and a bond event study for the secondary market, assessing the impact on a sustainable premium ("sustainium") following the enactment. Sustainium disappears from the primary market after the ESG Disclosure Act. Abnormal corporate bond returns in the secondary market are negative, and the impact on the sustainium is not economically different from zero. We also find that long-term corporate bonds are more vulnerable to the ESG Disclosure Act. These findings indicate that investors should assess ESG bonds according to long-term horizons if the sustainium is expected to persist.