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The Demand Of Green Bonds Is Creating A “Greenium” Effect

With Green Bonds in Heavy Demand, A “Greenium” Effect Changes the Borrowing Landscape

Green bonds aren’t the new kids on the financial block anymore, having been around since 2007, and having passed $1 trillion in cumulative issuance at the end of last year. But there is at least one thing that’s fairly new about green bonds: the concept of a “greenium.”

If you’re not familiar with the term, The Wall Street Journal defined greenium as “a measurement of how much extra investors will pay for green bonds compared with conventional bonds.” Green bonds, also known as climate bonds, are used to finance environmentally friendly projects around the world, from renewable energy and clean water to green technology.

Heavy demand for green bonds in recent years has driven up their prices and lowered their yields. As the WSJ pointed out in a December article, there is mounting evidence that companies and government entities which borrow funds using green bonds stand to save a good deal of money.

Part of that evidence comes from researchers such as Thierry Roncalli, head of Quantitative Research at Amundi SA, a Paris-based money manager. Roncalli’s team has spent much of the COVID-19 pandemic running financial calculations on green bonds. One thing the team learned is that companies and governments selling green bonds got a premium as high as 0.11 percentage point. That might seem like a pretty slight figure, but it can significantly lower borrowing costs.

Why is this important? Because it provides further evidence that demand for sustainable investments might now be big enough to influence the behavior of both corporations and government bodies. This is not only good news for efforts to combat climate change, it also shows that investors with an eye on protecting the environment are more likely to lend to green projects at even lower rates than the broader bond market, which has lately seen borrowing rates fall to near historic lows.

For proof of the greenium effect, look no further than Verizon Communications. In September, the New York-based telecom giant issued a $1 billion green bond to fund renewable energy projects. The premium on that bond was about 50 percent higher than the premium Verizon got on the first green bond it sold in February 2019. Investors paid a premium of about 0.14 percentage point on the September deal, Verizon Treasurer Scott Krohn told the WSJ. That premium shaved around $1.4 million off the debt’s annual interest expense.

Although the COVID-19 pandemic slowed the issuance of green bonds during the first half of 2020, the pace picked back up during the latter half of the year. Issuance of green bonds hit a new high in September at more than $50 billion, Bloomberg reported. Following the footsteps of the US, after the issuance of Germany’s first green bond, the pace should pick up even more – especially since the European Union announced plans to sell as much as 225 billion euros ($265 billion) of green bonds. 

Germany’s first green bond launched in September with a yield of negative-0.463 percent, which equaled a 1 basis point premium compared to a conventional bond. One unique aspect of Germany’s green debt plan is that each green bond sold will be matched with a conventional twin. This structure is designed to show investors the exact cost of going green without having to do any additional calculations.

“In this case, two similar bonds will help to clarify the ‘greenium’ (as) it will narrow the sources of differences and potentially justify that green bonds offer additional transparency and environmental benefits at no additional cost,” Johann Ple, portfolio manager at AXA Investment Managers, told Reuters in an article last fall.

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