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The Journal of Alternative Investments

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Green Bond Pricing: The Search for Greenium

Candace Partridge and Francesca Romana Medda
The Journal of Alternative Investments Summer 2020, 23 (1) 49-56; DOI: https://doi.org/10.3905/jai.2020.1.096
Candace Partridge
is a visiting researcher of the Institute of Finance and Technology at University College London in London, UK
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Francesca Romana Medda
is the director of the Institute of Finance and Technology at University College London in London, UK
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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, portfolio management/multi-asset allocation

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.

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The Journal of Alternative Investments: 23 (1)
The Journal of Alternative Investments
Vol. 23, Issue 1
Summer 2020
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Green Bond Pricing: The Search for Greenium
Candace Partridge, Francesca Romana Medda
The Journal of Alternative Investments Jun 2020, 23 (1) 49-56; DOI: 10.3905/jai.2020.1.096

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Green Bond Pricing: The Search for Greenium
Candace Partridge, Francesca Romana Medda
The Journal of Alternative Investments Jun 2020, 23 (1) 49-56; DOI: 10.3905/jai.2020.1.096
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    • US GREEN MUNICIPAL BONDS
    • THE SEARCH FOR GREENIUM: LITERATURE REVIEW
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