Practical Applications of Green Bond Pricing: The Search for Greenium

Practical Applications

In Green Bond Pricing: The Search for Greenium from the Summer 2020 issue of The Journal of Alternative Investments, authors Candace Partridge and Francesca Romana Medda (both of University College London) explore whether green bonds—those that support environmentally sustainable projects like clean-energy production—can fetch high prices and provide competitive returns. The authors ask whether there is a green premium—or “greenium”—in the pricing or performance of green municipal bonds and find that generally they fetch the same up-front price as nongreen bonds in the primary market but provide higher returns on the secondary market.

Partridge and Medda say this difference exists because governments sell bonds primarily to a small number of institutional investors on the primary market, whereas a wider range of investors can buy on the secondary market. More competition for green bonds equals more demand, which raises prices and produces more visible greenium. In the primary market, the main benefit of green bonds may be to raise the profile among ESG investors of the issuing cities and states.

TOPICS: ESG investing, fixed income and structured finance, performance measurement