Common ground taxonomy premium: evidence from the corporate green bond market

Fragmentation among taxonomies inhibits international green capital flows. International harmonization of taxonomies – exemplified by the Common Ground Taxonomy (CGT) – is critical to advancing cross-border climate finance. Despite its importance, empirical evidence on the financial consequences of CGT adoption remains absent in the literature. Utilizing a sample of green bonds aligned with both the EU and China taxonomies (CGT green bonds), we document a statistically and economically significant CGT premium on corporate green bonds, driven predominantly by international demand. We further demonstrate that issuance of CGT green bonds generates positive pricing spillovers on the non-CGT green bonds from the same issuers. However, these spillovers attenuate for bonds financing projects closely aligned with their CGT counterparts, in line with the theoretical prediction of our microeconomic model. Our findings suggest that CGT adoption enhances informational efficiency within the green bond market and facilitates more effective cross-border allocation of green capital, reinforcing the imperative of international taxonomy coordination.