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This paper investigates whether banks that issue green bonds exert a real effect on their loan borrower firms' green performance. By analyzing the firm-level green performance data from 2002 to 2022, we find that after banks issued green bonds, the externally reported performance, such as environment, social, and governance (ESG) ratings and environmental score of their loan customers, improves, while the real green performance measured by environmental incidents and CO2 intensity is worse. To address the potential endogeneity concern, we utilize the Asset Purchase Programs (APP) operated by the European Central Bank (ECB) as an exogenous shock to the eligible banks. Eligible banks are more likely to issue green bonds after the announcement of an APP. Using the program as an instrumental variable, we show consistent results. Additionally, we show that a bank with green bonds strategically lends to borrowers with a higher divergence on real green performance to meet the obligations on green investments, and hedge by brown investments. At last, we find that a better regulatory environment and higher level of institutional ownership amplify the effects brought by green bond issuance. These findings provide critical insights into the effectiveness of bank-issued green bonds.
