Asymmetric Effects of Environmental Policy Stringency on Sustainable Financing Costs: Evidence from OECD Member and Partner Economies

Abstract

Research Question: Does environmental policy stringency exert asymmetric effects on sustainable financing costs, with policy rollbacks imposing disproportionately larger penalties than equivalent policy tightening generates benefits? Motivation: Green bond issuance has grown from USD 11 billion in 2013 to over USD 500 billion in 2023, heightening interest in how government climate policy shapes sustainable financing costs. While prior research establishes that environmental policies influence traditional financing costs (Chava, 2014) and that green bonds trade at a premium (Zerbib, 2019), a critical puzzle remains: do markets respond symmetrically to policy changes, or does policy credibility create asymmetric effects that standard linear models overlook? This study introduces a nonlinear perspective by applying the NARDL framework to decompose cumulative policy changes into tightening (EPS⁺) and loosening (EPS⁻) components, providing the first systematic evidence of asymmetric policy effects across a broad OECD-member and partner green bond panel. Understanding asymmetric policy transmission is essential for climate policy design, revealing whether policy backsliding imposes disproportionate costs that undermine sustainable finance mobilisation. Idea: We hypothesise that policy loosening raises green bond yield spreads more than policy tightening reduces them, reflecting loss aversion. Financial market development and climate vulnerability serve as moderators. Data: A bond-level panel of 2,351 green bond observations across 35 OECD-member and partner economies from 2013–2023, combining Bloomberg, the OECD Environmental Policy Stringency index, World Bank financial development indicators, and ND-GAIN climate vulnerability measures. Method/Tools: Nonlinear Autoregressive Distributed Lag (NARDL) estimation with country and year fixed effects and Driscoll-Kraay standard errors. Findings: Policy loosening raises spreads by approximately 9 basis points, more than twice the 4 basis point reduction from equivalent tightening (asymmetry ratio 2.27:1; Wald test p = 0.004). Effects are amplified in financially developed and climate-vulnerable economies. Contributions: This research documents a “policy credibility ratchet” in global green bond markets, bridging environmental economics and sustainable finance literatures and offering actionable insights for credible climate policy design.