ECB Research Shows Green Bond Premium Doubles with Strong Environmental Scores

The paper finds a baseline greenium of approximately 16 basis points for the green label alone when comparing yields at issuance of green bonds to matched conventional bonds.

This premium nearly doubles to around 32 basis points when the issuer's environmental score, or E-score, is in the top tercile of the cross-sectional distribution.

Certified green bonds also see an increase in the greenium by about 15 basis points.

The study highlights that this two-tiered pricing mechanism strengthens significantly during periods of heightened climate change stress, where the issuer-adjusted greenium can widen to around 44 basis points.

This indicates that investors look beyond just the green label, rewarding both the use of proceeds and the climate identity of the borrower, especially when climate risks are perceived to be on the rise.

The analysis tracks around 9,500 green bonds and over 250,000 traditional bonds across 73 and 145 countries respectively, spanning a decade of issuance.

Over the last decade, green bonds have transitioned from niche instruments to a widely adopted financing tool, with global placements exceeding 3 trillion US dollars by 2024. The study's findings help reconcile divergent estimates for the greenium found in existing literature by emphasizing the importance of considering issuer characteristics beyond the bond's green label.

A key policy implication is that firms, even those without a top environmental performance, can still obtain a price advantage when issuing a green bond, provided the underlying green project is convincing.

This mechanism creates incentives for a broader range of companies to undertake climate-friendly investments.

The authors argue that imposing higher financing costs solely on high-emission firms might inadvertently encourage them to maintain polluting technologies rather than transitioning to cleaner alternatives, potentially hindering full decarbonization.