ECB paper: Environmental score doubles green bond premium
A new European Central Bank (ECB) working paper provides empirical evidence of a two-tiered pricing approach for green bonds. The study finds a 16 basis point premium for the green label alone, which nearly doubles when the issuer's environmental score is in the top tercile.
The two-tiered greenium
The ECB working paper reveals a sophisticated, two-tiered pricing mechanism for green bonds.
Investors not only consider the green label but also the issuer's environmental score and the soundness of the underlying project.
The baseline analysis identifies a 16 basis point premium, or 'greenium,' for the green label itself.
This greenium nearly doubles when the issuer's environmental performance is in the top third of the distribution of an environmental score indicator.
Furthermore, certified green bonds show an additional premium of around 15 basis points.
The study, tracking approximately 9,500 green bonds and 250,000 traditional bonds across many countries, highlights that this two-tiered pricing intensifies during periods of heightened climate uncertainty.
This indicates investors more aggressively reward climate identity when risks are perceived to be on the rise.
Beyond the label: Incentivizing transition
Green bonds have evolved from niche instruments to a widely adopted financing tool, with cumulative issuance exceeding $3 trillion by 2024. The paper's findings help reconcile divergent estimates for the greenium in existing literature by emphasizing the importance of looking beyond the bond's green label.
A key policy implication is that firms without top environmental performance can still achieve a pricing advantage by issuing green bonds, provided the underlying green project is convincing.
This incentivizes a broader range of companies to undertake climate-friendly investments.
The authors caution that merely shifting global portfolios towards low emitters might not lead to full decarbonization or effective transition risk mitigation.
Greenium: More Than Meets the Eye
This working paper significantly advances the understanding of green bond pricing by demonstrating its multi-faceted nature.
Its empirical evidence, spanning a vast dataset, effectively reconciles prior literature's disparate findings on the greenium.
The policy implications are particularly insightful, suggesting a nuanced approach to incentivizing decarbonization beyond simple issuer-level greenness.