ECB Working Paper: Green bonds yield premium tied to issuer's environmental score
A new European Central Bank (ECB) working paper finds that green bonds offer a yield premium, or 'greenium,' of up to 32 basis points. This premium is not only tied to the green label but also significantly influenced by the issuer's environmental performance and project soundness.
Environmental score doubles greenium
The paper provides empirical evidence that green bond pricing is sophisticated, with investors considering both the green label and the issuer's environmental score (E-score).
A baseline greenium of 16 basis points is identified for the green label alone.
This premium nearly doubles to approximately 32 basis points when the issuer's E-score is in the top tercile of the cross-sectional distribution.
Green certification also significantly increases the greenium by around 15 basis points.
Researchers found this two-tiered pricing mechanism strengthens during periods of heightened climate uncertainty, indicating investors reward both the use of proceeds and the borrower's climate identity more aggressively when climate risks are on the rise.
Tracing the 3 trillion dollar green bond market
Green bonds have evolved from niche instruments in 2014 to a widely adopted financing tool, with cumulative global issuance exceeding 3 trillion US dollars by 2024. This rapid growth has spurred scholarly attention on whether green bonds enjoy a systematic pricing advantage, known as a greenium, and what factors investors reward.
The study tracks around 9,500 green bonds issued in 73 countries and compares them to over 250,000 traditional bonds across 145 nationalities.
The analysis aims to reconcile divergent estimates for the greenium found in existing literature by looking beyond just the bond's label.
Incentivizing broader climate action
A key policy implication is that even firms without a top environmental performance can secure a price advantage by issuing green bonds, provided the underlying green project is convincing.
This creates crucial incentives for a wider range of companies to undertake climate-friendly investments, rather than solely focusing on inherently green champions.
Furthermore, the paper suggests that merely shifting global portfolios away from high emitters may not lead to fully-fledged decarbonization or effective transition risk mitigation.