Retail investors shape greenium, face macroeconomic headwinds

A study by Pietsch and Salakhova reveals that retail investors in the European corporate bond market significantly influence the 'greenium' – a price premium for green bonds that offers lower returns to investors but cheaper financing for issuers.

In 2020, retail investors' demand for green bonds surged, leading to a pronounced premium.

This shift coincided with an increase in retail holdings of green bonds from less than 5 percent to over 35 percent, particularly in bank-issued bonds.

However, this trend did not last, with the greenium declining and becoming statistically insignificant by late 2023.

Retail investors accept lower returns for green bonds, often disregarding actual environmental performance.

The paper employs data from Securities Holdings Statistics at a sector level to identify direct holdings of green bonds by retail investors, using a sample of approximately 450 green bonds representative of 20 percent of the market.

The global green bond market grew rapidly to over $2.9 trillion by 2025 but slowed after 2022, mirroring broader corporate bond trends.

This slowdown was driven by macroeconomic challenges including Europe's energy crisis, rising inflation, and global monetary policy tightening.

The greenium's decline after 2020 aligns with this monetary policy tightening, which constrained retail investors' financial capacity.

While institutional investors prioritize credibility and environmental performance, retail investors show limited sensitivity to actual environmental impact.

This raises concerns about greenwashing, highlighting the need for robust regulatory frameworks like the EU Green Bond Standard to ensure transparency and credible environmental outcomes.