Greenium

Sustainability - sustainable finance - pricing.

Greenium is a compound of "green premium".

It is sometimes also expressed more fully as green premium, green bond premium or green bond issuance premium.

In this context, greenium means the saving an issuer can enjoy on its cost of borrowing, because it is issuing a green or thematic bond - or other green or thematic instrument - rather than a conventional instrument.

The greenium is the amount by which the yield on the green instrument is lower, compared with the conventional instrument.

One explanation for the greenium is that investors are willing to pay more - reflected in a reduced investment yield - for the perceived benefits of investing in the green instrument.

However, observed differences in yield may also stem from other factors including limited supply of green instruments, some dedicated funds being mandated to invest in green instruments only, and differences in maturity, coupon, or issuers' credit ratings.

Another rationale, or rationalisation, for greenium is that sustainability in the use of proceeds implies a reduction in the risk of the cash flows used to service the borrowing. On the other hand, the possibility of arbitrage is an argument against this (see "Indifferent arbitrageurs" quote below).

There is broad - though not universal - agreement about the existence of a greenium, but divergence of estimates about its size.

Theory and evidence for greenium - United Nations Development Programme (UNDP)

"The ‘greenium’, or green premium, refers to pricing benefits based on the logic that investors are willing to pay extra or accept lower yields in exchange for sustainable impact...

There are several technical arguments to support the existence of a favourable ‘greenium’ pricing – defined as the difference in yield between thematic bonds and ordinary bonds of a similar maturity. Among others:

Firstly, a greenium is fundamentally a part of the overall discount factor (or the required rate of return) in the vantage point of the investor. The sustainability factor associated with a thematic bond is a credit positive – such that the issuance of the bond is perceived to improve sustainability. This in turn results in lower overall risk of the issue (issuer). This would warrant a lower yield (higher price) relative to the normal curve (i.e. greenium).

Secondly, the demand and supply equation: higher demand for thematic debt, and in instances where specific funds mandate investments in sustainable instruments, would create excess demand for thematic debt resulting in higher prices for investors, thus lower yields.

Thirdly, the mission value or the true appreciation of sustainable features results in a willingness from investors to accept a lower return for a thematic bond.

Irrespective of the circumstances, empirical evidence suggests the existence of greeniums – although this might not always be the case, and its range may differ from a few basis points to more significant values. The spread could perhaps explain the varying degrees of the different vantage points above. For example, for an issuer, signalling a stronger sustainability use of proceeds, greater risk reduction and long-term positive impacts, which also improve operations, could yield a larger greenium, while a less compelling green story could have the opposite effect."

Identifying the ‘greenium’ - How UNDP is contributing to a more efficient cost of capital for developing countries - April 2022.

Only credible issuers enjoy greenium - ECB

"Our findings show that, first, in the absence of regulatory standards, investors seek credibility of green bonds and issuers.

In terms of bond credibility, we find that only bonds with external review trade at both a statistically and economically significant greenium.

Regarding issuers’ credibility, we define firms in the alternative energy sector as credible as well as banks that signed for the United Nations Environment Programme Finance Initiative (UNEP FI).

We find that only green bonds issued by credible companies trade at a statistically and economically significant greenium.

The presence of the greenium is still debated in the literature, and our findings contribute to this debate by providing additional evidence on the presence of the greenium in secondary markets, and, particularly, on the importance of credibility for green bonds."

Pricing of green bonds: drivers and dynamics of the greenium - European Central Bank - Working Paper 2728 - September 2022.

Calculating the 'greenium'? Germany may have the answer - Reuters

"Germany’s debut green bond may finally provide an answer to the question that’s been at the heart of the sustainable investing spree - how much of a premium must investors pay to get hold of green securities?

The deal launched with a -0.463% yield, which lead managers said meant a one basis point premium compared to a conventional equivalent.

That difference represents what investors often call a 'greenium' - the price tag for a green issue.

Germany's green debt plan differs from peers such as France and the Netherlands in that each green bond sold will be matched with a conventional twin.

And whenever an existing green bond is tapped, its twin will be upsized by the same amount.

The structure will show investors the exact cost of going green. Until now, gauging the green premium meant examining an issuer’s regular yield curve to gauge where a hypothetical conventional bond identical to the green bond in question might trade.

'For the first time, we will be able to exactly see what the (green) premium looks like without having to do any maths, except for a simple "minus" calculation, one yield minus the other,' said Christoph Rieger, head of rates and credit research at Commerzbank in Frankfurt...

So Germany’s structuring of this issue could well be key in drawing more borrowers to the green market."

Reuters - Yoruk Bahceli - 2 September 2020

Tesco enjoys greenium - ACT

"Investor interest in sustainability-linked bonds (SLB) is clear from the ‘greenium’ or pricing benefits issuers have enjoyed.

Tesco’s [January 2021] SLB, for example, priced 15bps inside its secondary curve."

Agnes Gourc and Cecile Moitry - co-heads, sustainable finance markets - BNP Paribas - The Treasurer online - 10 June 2021

The greenium: 26 out of 33 green bonds priced on or inside their yield curves

"The new issue premium is the [difference in yield] for a new bond compared to where seasoned bonds from the same issuer are trading in the secondary market at the time of issuance...

There is no reason why a bond being green should impact its price, since green bonds rank pari-passu (on equal footing) with bonds of the same payment rank and issuer. There is no credit enhancement to explain pricing differences and issuers of green bonds often incur costs such as Second Party Opinions and Certification, although these are typically negligible.

Green bonds and vanilla equivalents are subject to the same market dynamics..."

Green bond pricing in the primary market - July to December 2020 - Climate Bonds Initiative

Indifferent arbitrageurs

"One of the main arguments against the existence of a greenium is the possibility for arbitrage.

For an individual issuer with two outstanding bonds, one green and one non-green, if there were a difference in yield caused solely by the green label, one would expect an indifferent investor (when it comes to the use of proceeds) to be able to take advantage of this difference in yield, assuming all else being equal...

The continued increase in both the size and diversification of the green bond market will help balance out the lack of supply relative to demand, which is likely to reduce the existence of greeniums in specific corners of the market."

Greenium – fact or fiction? - Affirmative Investment Management Partners Limited - 4 March 2021

See also

• Alternative Credit Council (ACC)
• Alternative energy
• Arbitrage
• Bond
• Basis point (bp)
• Certification
• Climate Bonds Initiative
• Coupon
• Credibility
• Credit enhancement
• Credit rating
• EU Green Bond Standard (EUGBS)
• European Central Bank (ECB)
• Fair trade
• Green
• Green bond
• Green curve
• Green gilt
• Green halo
• Green story
• Issuance
• Issuer
• Liquidity premium
• Maturity
• Pari passu
• Premium
• Primary market
• Rank
• Regulatory standard
• Return
• Risk premium
• Seasoned security
• Second Party Opinion (SPO)
• Secondary curve
• Secondary market
• Socium
• Statistical significance
• Sustainability-linked bond (SLB)
• Tap
• Term premium
• Thematic bond
• United Nations Development Programme (UNDP)
• United Nations Environment Programme Finance Initiative (UNEP FI)
• Vanilla
• Yield curve

External links

• Identifying the ‘greenium’ - How UNDP is contributing to a more efficient cost of capital for developing countries - April 2022
• Pricing of green bonds: drivers and dynamics of the greenium - European Central Bank - Working Paper 2728 - September 2022
• Green bond pricing in the primary market - July to December 2020 - Climate Bonds Initiative
• Greenium – fact or fiction? - Affirmative Investment Management Partners Limited