Looking For the Green Light Called "Greenium"
The Sustainability Premium: How Greenium is Disrupting Bond Yields
In recent years, the Green Bond Market has been rapidly expanding. According to Climate Bond Initiative (CBI) reports, the green bond market grew by an average of 50% per year globally between 2015 and 2020. As the market continues to grow, investors are becoming increasingly interested in a concept called "Greenium."
Greenium refers to the lower yield that investors receive when they purchase green bonds, compared to conventional bonds. This reduced interest rate for the issuer of green debt instruments creates an important incentive to issue more green-labeled bonds. This is because greenium effectively reduces the cost of financing for companies that are committed to sustainable and environmentally-friendly practices.
Does Greenium Exist?
There have been claims from some studies that suggest greenium is nothing but a marketing tool that is used to promote green bonds, and that there is no significant difference in pricing between green and conventional bonds. However, a recent journal titled “In Search of Greenium. Analysis of Yields in the European Green Bond Markets”(2022), analyzed the pricing of green bonds and conventional bonds with similar credit risk and maturities. The findings revealed that green bonds in the entire European bond market are actually priced at a discount, compared to their counterpart. This discount, also known as greenium, was estimated to be around 4 basis points (bps).
The existence of greenium suggests that investors are willing to accept a lower yield for green bonds in comparison to conventional bonds leading them to being priced tighter. This is significant because investors are willing to pay a premium for bonds issued by companies committed to sustainable practices, despite offering a lower yield or return.
The data also discovered that bonds issued by European utilities or financial corporate firms can command higher greenium by 149 bps or 125 bps, respectively. This trend is not surprising, given that utilities and financial corporate firms are among the largest emitters of greenhouse gases, and therefore, are under pressure to transition towards more sustainable practices. By issuing green bonds, these firms are not only able to raise funds for their projects but also signal to their investors and stakeholders their commitment to sustainability and emission reduction.
Interestingly, the study found that there is no statistically significant greenium in the green bond markets of the UK, France, Netherlands, and Germany. This suggests that greenium may still need more time to develop in different regions that may have differing perceptions of the value of these green bonds.
Greenium In Developing Countries - India
In January 2023, India made an unprecedented move by debuting its first green bond, raising a whopping ₹8,000 crore through the sale of 5-year and 10-year green bonds. This move by the Indian government is a significant step towards meeting the country's ambitious target of achieving 500 GW of renewable energy capacity by 2030, as well as its commitment to reducing carbon emissions under the Paris Agreement.
The positive reception of India's initial green bond offering may result in the pricing phenonomena, greenium, compared to a regular government bond with similar features. State-owned banks are expected to demonstrate robust demand for sustainable assets. However, the demand among foreign portfolio investors plays a key role in determining the sustainability of issuing green bonds at a greenium. If foreign investors show strong demand for India's green bonds, it could help to lower the country's borrowing costs, while also attracting more capital towards its renewable energy projects.
India's acknowledgement of the key role of foreign investors is evident in the Reserve Bank of India's decision to designate green bonds as securities under the "Fully Accessible Route" for foreign investors. This move allows foreign investors to buy and sell green bonds without any restrictions, providing them with the same advantages as domestic investors. This is expected to boost the overall demand for India's green bonds through the greenium, and attract more foreign investment towards the country's renewable energy sector.