Greenium
Sustainability - sustainable finance - pricing.
Greenium is a compound of "green premium".
In this context, greenium means the saving that 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.
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
