Greenium

Sustainability - sustainable finance - pricing.

Greenium is a compound of "green premium".

It is sometimes also expressed in full as green premium.

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

Calculating the 'greenium'? Germany may have the answer

"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

Issuers enjoy greenium

"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.

A new issue premium is a standard feature of the bond market. Sometimes, a bond may be issued with a higher price - and thus have a lower yield - compared to outstanding debt. The bond will price inside its own yield curve. This is known as a new issue concession; when present in a green bond, we have termed it 'greenium'.

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

• Arbitrage
• Bond
• bp
• Certification
• Climate Bonds Initiative
• Coupon
• Credit enhancement
• Credit rating
• Fair trade
• Green
• Green bond
• Green curve
• Green gilt
• Issuer
• Liquidity premium
• Maturity
• Pari passu
• Premium
• Primary market
• Return
• Risk premium
• Seasoned security
• Second Party Opinion
• Secondary curve
• Secondary market
• Sustainability-linked bond (SLB)
• Tap
• Term premium
• Vanilla
• Yield curve

External links

• Green bond pricing in the primary market - July to December 2020 - Climate Bonds Initiative
• Greenium – fact or fiction? - Affirmative Investment Management Partners Limited