Shades of green: Can external verification make green bonds more credible?
L FERNANDO DISTADIO AND SHIREENJIT JOHL |
As global momentum builds around the transition to a low-carbon economy, the role of green finance is becoming increasingly vital. Among the most prominent tools in this shift are green bonds—financial instruments designed to fund environmentally beneficial projects. But with growing demand comes growing scrutiny: How can investors trust that green bonds are truly green?
Our recent study set out to explore this question. We focused on external verification and assurance—voluntary steps companies can take to confirm the environmental credibility of their green bonds. Using a dataset of 774 green bonds issued by listed non-financial firms between 2013 and 2021, we examined how the market reacts to these credibility-enhancing mechanisms.
Why does green bond credibility matter?
While green bonds have grown rapidly—reaching an estimated US$2.5 trillion in 2023—their credibility is not guaranteed. Unlike traditional bonds, green bonds make non-financial claims about their use of proceeds. This opens the door to “greenwashing”, where issuers may exaggerate environmental benefits without meaningful change.
That’s where external verification and assurance come in. Issuers may voluntarily engage a third party to review whether their bond aligns with Green Bond Principles (GBPs)—best-practice guidelines promoted by the International Capital Market Association (ICMA). Some go further by commissioning formal assurance statements, which are more rigorous and follow international audit standards.
Key findings
- Green bonds accompanied by third-party verification were associated with statistically significant positive abnormal returns of approximately 0.30% over a three-day window following the announcement.
- First-time issuers that included verification reports experienced stronger positive market reactions, suggesting that verification serves as a signal of environmental credibility.
- Issuances supported by assurance reports (involving adherence to professional assurance standards) were particularly beneficial for firms with poor sustainability performance (e.g., high CO₂ emitters).
- Post-issuance verification—ongoing monitoring of proceeds allocation—was also positively associated with market responses.
These findings are consistent with signalling theory, whereby companies reduce information asymmetry by adopting costly, voluntary mechanisms to communicate their environmental commitment.
A market signal worth sending
The study applies signalling theory based on the issuing firm’s communication about their intentions through costly signals. In this context, third-party verification and assurance serve as a credible signal that an issuer is serious about climate-aligned finance. It’s a voluntary act that goes beyond the minimum, thus earning investor trust.
For policymakers, these findings are especially timely. Regulatory reforms in Europe, such as the EU Green Bond Standard, are beginning to formalise requirements for verification and assurance. The authors suggest that credible external verification should be incentivised to strengthen market discipline and mitigate greenwashing.
Implications for practice and policy
This study offers several practical and policy-relevant implications:
- Issuers may benefit financially from engaging third-party verifiers and assurers, particularly when entering the green bond market for the first time.
- For high-emitting firms, assurance reports may serve as a valuable tool to improve credibility and investor confidence.
- Regulators considering mandatory verification requirements—such as under the EU Green Bond Standard—may find our findings relevant to the design of future frameworks.
Our results support the view that credible third-party verification enhances the economic and reputational value of green bond issuance. As the green bond market continues to evolve, further research into the quality, scope, and regulatory oversight of verification practices will be essential.
Looking ahead
While the green bond market continues to evolve, credibility remains its cornerstone. As this study shows, verification and assurance are not just bureaucratic box-ticking—they’re strategic tools that can build trust, reduce information asymmetry, and create financial value.
In a world where climate goals are urgent and scrutiny is rising, issuing green bonds with robust external oversight is not just good practice—it’s good business.
Dr L Fernando Distadio and co-author Professor Shireenjit Johl are members of the Griffith Asia Institute.
Get in touch with the corresponding author L. Fernando Distadio at l.distadio@griffith.edu.au.
This article is a synopsis of a journal article: Distadio, L. F., & Johl, S. (2025). Shades of Green in the Bond Market: The Role of External Verification Reports. The International Journal of Accounting, 2541001. https://doi.org/10.1142/S109440602541001X.