The green bond market has increased exponentially since the first issuance in 2007. Nevertheless, we continue to observe a large imbalance between supply and demand because of the huge appetite from institutional ESG investors. The purpose of this study is then to determine if green bonds present lower yields than conventional bonds in the secondary market. This yield difference is known as the green bond premium or greenium. From the issuer’s point of view, a green bond issuance is more expensive than a conventional issuance due to the need for external review, regular reporting and impact assessments. From the investor’s point of view, there is no fundamental difference between a green bond and a conventional bond, meaning that one should consider a negative green bond premium as a market anomaly. For estimating the green bond premium, we consider two approaches: a top-down approach and a bottom-up approach.  The underlying idea of the top-down approach is to compare a green bond index portfolio to a conventional bond index portfolio with the same characteristics in terms of currency, sector, credit quality and maturity, whereas the bottom-up approach compares the green bond of an issuer with a synthetic conventional bond of the same issuer, currency, seniority and duration. The two approaches show that the greenium is negative between -5 and -2 bps on average. However, we observe some differences between sectors, currencies, maturities, regions and ratings. Again, we observe a transatlantic divided between US and Europe. Another important result concerns the volatility of green bond portfolios, which are lower than the volatility of conventional bond portfolios. Therefore, it follows that they both present an identical Sharpe ratio since the last four years. A third main result is the time-varying property of the greenium. This is particularly true during periods of stress or the covid-19 crisis. Finally, we also found that the magnitude of the green bond premium depends on the certification under climate bonds standards. Green bonds are the simplest way to make a positive impact by investing, and the cost of this impact investing is relatively low as mentioned before. Nevertheless, it is obvious that the issue of the green bond market is the left side of the supply/demand equation. This study shows that bond issuers may have a competitive advantage to finance their environmental projects using green bonds instead of conventional bonds, especially since a green bond issuance may exhibit a “green bond issuer premium”. The ball is then in the court of corporate firms if they want to benefit of the large mobilization of ESG investors for fighting climate risk.

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RC - Author - Ben Slimane Mohamed
Head of Fixed Income Quant Portfolio Strategy, Amundi Investment Institute
Credit Portfolio Management
Alpha Fixed-income Solution