Incredulous creditors: ESG momentum, credibility barriers, and state-contingent pricing in corporate bonds

This paper investigates the pricing of ESG momentum in corporate bond markets, identifying a credibility barrier that conditions whether sustainability improvements are rewarded by investors. Analysing a decade-long panel of 3,380 unique EUR-denominated bonds, we document that ESG momentum exhibits state-contingent effects across the return distribution, providing downside protection in the left tail, particularly for subordinated debt, while penalising higher-return scenarios among BBB-rated and subordinated bonds, unless the issuer demonstrates credibility through low ESG controversy and minimal institutional investor exclusions. Among issuers with established credibility, ESG momentum earns up to 88 basis points monthly, revealing that markets reward genuine operational improvements while dismissing opportunistic signalling. Neither green bond labels nor third-party verifications substitute for this credibility channel. However, exploiting the EU’s Sustainable Finance Disclosure Regulation as a natural experiment, we show that SFDR generated a significant return premium for Developed Europe-domiciled bonds broadly (0.32 basis points per month, $$p<0.001$$ ), altering ESG momentum and green label-pricing dynamics subtly.