Green Bond Pricing: The Search for Greenium

Abstract

Green bonds are a novel way to help unlock finance for investment in sustainable development. Some issuers and investors are watching this market with keen interest to see whether a green premium—or “greenium”—arises. The current consensus in the literature is that there is a detectable greenium in the secondary markets for corporate and US municipal bonds, but evidence for a greenium at issue is more difficult to detect. The authors provide a summary of the pricing literature and a description of their green municipal bond pricing analyses and then unpack these findings and offer an explanation as to why there is a difference in greenium behavior in the primary and secondary markets.

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

Key Findings

• • We find that there is no clear pattern in the literature as to whether or not there is a “greenium,” or green premium, although there is a stronger signal for greenium in the secondary markets.

• • We assert that in the US municipal bond market, this effect arises because of the way that the market is constructed, in that buying a bond at issue is less accessible to smaller investors than buying one in the secondary market.

• • Without a significant number of price points showing a greenium at issue, green issuers are not incentivized to price their bonds higher for fear of pricing themselves out of the market.