Green bonds offer ‘significantly lower’ yields than conventional notes, says research

Danske Bank’s head of sustainable bonds questions whether 15-20bps ‘greenium’ estimate exaggerates true picture

Green bond yields are on average 15-20 basis points (bps) lower than comparable conventional bonds on both primary and secondary markets, according to the latest academic research into whether investors are paying additional costs for green debt.

Drivers of green bond issuance and new evidence on the ‘greenium’, authored by three scholars from the Jönköping International Business School in Sweden and based on data from Refinitiv, assesses around 2,000 labelled green bonds issued between 2007 and 2019, and matches them with non-green bonds to determine if there is a so-called ‘greenium’. 

The study, published last week, found “significantly lower” yields for green bonds “than for comparable non-green bonds, both in the primary as well as in the secondary market”, leading it to conclude that “a ‘greenium’ exists”. 

The research is billed as the first to “explicitly” look at both the primary and secondary green bond markets. It matched bonds based on characteristics such as issuer, size, seniority and tenor.  

But Danske Bank’s Head of Sustainable Bonds, Lars Mac Key, questioned the findings, telling RI that, while he agrees there is a greenium, it is not as high as the study suggests. 

“We’ve definitely had 30 or 40 basis points [lower yields] in some cases, but to say that the average is 15-20 is an exaggeration,” he said.

He added that “negative premiums” are mainly driven by high demand for green bonds, including investors with more specific mandates, such as dedicated green bond funds, which he described as “stickier” even when spreads tighten. 

When asked about potential negative implications of the ‘greenium’, Mac Key told RI that there would be a problem if the bonds did not hold their pricing advantage after issuance, but “they’re actually performing well in the secondary market as well, because you have an investor base that has a great interest in these products and you have a growing field of dedicated green mandates”.

The academic study offers two potential explanations for the existence of the ‘greenium’: 

1) That green bonds have lower underlying risks and, therefore, are more attractive to investors despite such premiums, or 

2) Institutional investors are simply willing to pay more for the green label. 

It concludes that the latter is more “plausible”, since it also found that “green bonds belong to issuers with higher risk”.

“[A]round 85% of non-green and 72% of green bonds are from issuers with a high or medium rating grade, whereas nearly 13% and 25%, respectively, are from issuers without a rating,” according to the study. 

It also found that green bonds are more likely to be senior unsecured debt compared to non-green paper. 

On risk, the study highlights that, while conventional bonds may carry long-term climate change risks, green bonds too might also “carry specific risks due to the uncertainties surrounding the development of green technologies”. “This nexus of risks associated with the green label, if priced, could reduce the greenium” it suggests, and recommends explorations into the differences between idiosyncratic and systematic risks in green bonds as a topic for further research. 

Authors of the paper are Kristin Ulrike Löffler, Aleksandar Petreski & Andreas Stephan.