Green bond pricing sophisticated, rewards issuer environmental score

The study reveals that green bond pricing operates on a two-tiered approach, where investors assess both the green label and the issuer's environmental score.

A baseline premium of 16 basis points is identified for the green label alone, reflecting a funding advantage for environmentally-oriented projects.

This 'greenium' significantly increases, potentially doubling, when the issuer's environmental score ranks in the top tercile of the cross-sectional distribution.

Furthermore, green certification and periods of heightened climate uncertainty are found to notably influence the magnitude of this greenium.

The research highlights that the issuer-adjusted greenium can widen to approximately 44 basis points during times of increased climate stress, even temporarily extending to mid-tier issuers, indicating a transient 'dash-for-green' phenomenon in the market.

These findings reconcile previous divergent estimates in the literature.

The rapid growth of green bonds, with over $3 trillion issued by 2024, has fueled extensive debate over their systematic pricing advantage, or 'greenium.'

This paper reconciles previous divergent estimates by showing investors assess both the specific use of proceeds and the issuer's overall climate identity.

A key policy implication is that even firms without top environmental performance can achieve a price advantage when issuing green bonds, provided their underlying green projects are robust.

This incentivizes a wider array of companies to undertake climate-friendly projects, fostering a more inclusive transition to a low-carbon economy and preventing high-emission firms from being locked into polluting technologies.