Analysis: “Greenium” contracts as climate bond sales hit record high

Wind turbines producing electricity are seen near Port Saint Louis du Rhône, near Marseille, on May 7, 2014. REUTERS / Jean-Paul Pelissier / File Photo

Investors have long paid a premium to get hold of rare green bonds, but a record issuance could be about to change that.

Bonds sold to finance environmentally beneficial projects have tended to charge higher prices and lower yields than conventional bonds. But this differential – dubbed the greenium – practically disappeared in April on the euro corporate bond market.

Comparing option-adjusted credit spreads on a euro green bond index with a comparable conventional bond index, the Association for Financial Markets in Europe, an industry body, found in April that investors paid virtually no premium to hold green corporate bonds. This compares to an average premium of 9 basis points in 2020.

Estimates vary depending on the methodology, as most green bonds do not have a directly comparable conventional par. But market players generally agree that greeniums are declining.

The driving force, it seems, is a sharp increase in supply.

According to Refinitiv, companies in the investment grade euro corporate bond market, a major source of green funding, have already raised almost as much through green bonds this year as they have throughout 2020.

This is good news for investment funds that are under pressure to invest according to environmental, social and governance (ESG) principles. But borrowers may need to reassess the cost benefit of financing themselves through the green market.

By selling their bonds, green issuers have consistently paid a lower new issue premium this year than conventional issuers, but the price advantage over conventional issues has halved from 2020, according to data from ABN AMRO.

The surge in issuance comes as borrowers around the world have raised $ 193 billion in green bonds this year, according to Refinitiv data as of May 25, a record for this time of year and nearly three times the amount. raised at this point in 2020.

“There is kind of a limit to how big the greenium could reach. Investors have yet to make returns,” said Barnaby Martin, head of credit strategy at BofA.

“If there is a lot more green debt, it will end up affecting technology.”

Another sign that green bonds are becoming scarce, green issues account for 16% of sales of investment-grade euro corporate bonds this year, more than double their share from last year, according to Refinitiv.

Much of the euro issuance comes from utilities and real estate companies, said Shanawaz Bhimji, senior fixed income strategist at ABN AMRO, noting that these sectors already have many green bonds in circulation.

“If there aren’t a lot of shows coming from sectors that offer diversification, the market is not going to pay,” he said.


In government bonds and in corporate sectors where green debt is scarce, greenium persists. For example, the Daimler Green Bond (DAIGn.DE) offers a credit spread of seven basis points tighter than a conventional bond maturing in the same year. , Learn more

And in the investment-grade US dollar market, with fewer green bonds, green borrowers have achieved a tariff advantage of around 10 basis points on issuance since 2020, according to Goldman Sachs, although this is down by compared to 16 basis points in 2016-2019.

But on both sides of the Atlantic, the scarcity premium is shifting towards social and sustainable bonds, argues the bank.

Social bonds fund expenses such as healthcare or education, while sustainable bonds can fund both social and green projects. They are rarer because the show only really got off the ground after the pandemic erupted last year.

Since last year, these bonds have offered issuers an average premium of 20bp on issuance in the euro investment grade market and 36bp in US dollars, Goldman estimates.

The good news for those who believe in the power of green finance to improve corporate environmental credentials is that the decline in greenium has not deterred issuers.

“We hear from companies that it’s not just about the concession. They really want to improve their position within the investment community,” said Bhimji at ABN AMRO.

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