DO GREEN BONDS PERFORM BETTER THAN CONVENTIONAL BONDS? NIYAZI BERK 1 , SELIN SARILI 2 & DINA CAKMUR YILDIRTAN 3 1 Bahcesehir University, Turkey 2 Sisli Vocational School, Turkey 3 Marmara University, Turkey ABSTRACT This study examines the performance of green bonds, utilizing the Standard and Poor’s (S&P) Green Bond Index, Bloomberg Green Bond Index, S&P US Aggregate Bond Index, and Bloomberg Barclays US Aggregate Bond Index as benchmarks. Monthly data spanning from July 2014 to February 2023 is analyzed. Key performance ratios including the Sharpe Ratio, Treynor Ratio, and Jensen Performance Ratio are computed for portfolio comparison. Our findings indicate that the S&P Green Bond Index outperformed compared to the Bloomberg Green Bond Index. Furthermore, we calculate and regress the S&P and Bloomberg Barclay’s greenium series against the consumer price index, Federal Reserve interest rates, and S&P 500 market returns. The study’s findings indicate that higher Federal Reserve interest rates and increased market returns cause a decrease in the yield gap between conventional and green bonds. Moreover, a rise in the Consumer Price Index is caused by a widening of the yield disparity between these two types of bonds. The results highlight an average investor loss of 2% when investing in green bonds, in contrast to conventional bonds. Keywords: green bond index, greenium, CAPM, Sharpe, Treynor, Jensen. 1 INTRODUCTION Due to the threats posed by global warming on the world and the fact that the governments of many countries have brought climate change to a more important place on their agenda [1], reducing reliance on fossil fuels and adopting a low-carbon economy is becoming a priority for policymakers in both developed and emerging economies [2]. In order to achieve these targets, for example, investments in fossil fuel extraction and fossil fuel-based conventional electricity generation will need to be significantly reduced, while investments in low-carbon energy production and energy efficiency will need to be increased significantly [3]. The United Nations Environment Program (UNEP) estimates the annual investment to be made until 2025–2030 within the scope of adaptation to climate change as 150 billion USD, and the annual investment to be made until 2050 for the 2°C scenario as 250– 500 billion USD [4]. Bonds, stocks and commodities markets that assist businesses in this fight against climate change now offer environmentally friendly financial means under the name of ‘green finance’ [5]; green finance is essential for raising funds to finance large- scale environmental projects, and its importance in financial assets has increased in recent years [6]. The main objectives of this study are as follows:  From an investor’s perspective, to determine the average return loss of investing in the bonds of companies issuing green bonds compared to traditional bonds;  To compare the financial performance indicators of issuers in the Bloomberg Green Bond Index and Standard and Poor (S&P) Green Bond Index and calculate their expected returns;  To identify the variables that affect the yield difference between traditional bonds and green bonds; Energy and Sustainability X 129 www.witpress.com, ISSN 1743-3541 (on-line) WIT Transactions on Ecology and the Environment, Vol 261, © 2023 WIT Press doi:10.2495/ESUS230111