Investors still paying up for ESG bonds as ‘greenium’ survives turbulent H1

ESG-labelled corporate bonds commanded a premium in the secondary market in the three months to the end of June despite turbulent market conditions, data from the Association for Financial Markets in Europe (AFME) has shown.

After narrowing to less than one basis point in February and March, the spread between ESG euro-denominated corporate bonds and their conventional equivalent trended down towards 3 basis points from May onwards, the AFME said in its quarterly sustainable finance report.

The association noted, however, that the “ESG premium” remained well below the peak of close to 10bps seen in 2020.

The trend is less clear in the sovereign green bond market. Green bonds issued by Germany and France continued to trade inside their conventional equivalents but the gap has been steadily closing since the start of the year. By the end of August, the greenium for German sovereign issues had fallen from 4bps to 2bps. France saw a similar reduction. Sweden has seen a greenium fairly consistently, but spreads for Dutch green bonds dipped into greenium territory only once over the last 12 months.

The AFME suggested that sustainability characteristics were not the sole consideration affecting spreads versus conventional bonds, with other technical factors including liquidity also influencing premia. The Netherlands currently has around €16 billion outstanding from its 2040 green bond.

Jurre Halsema, green bond portfolio manager at NN Investment Partners, said market sentiment this year has been dominated by macro factors such as the “Russia/Ukraine crisis” and changes to ECB monetary policy.

“These drivers impact the whole of the investment grade universe (both labelled and unlabelled bonds). Because of these macro themes, fundamental changes between the green and grey curve were muted so far this year – however looking ahead we believe that the labelled bond market will increase its momentum further (maintaining its trend) and converge more towards the grey curve as issuer diversification and liquidity increases.”

He noted, however, that “timing made a large difference in pricing” as market volatility increased in the first half of the year. “We have invested in new issues that came in significantly above the grey curve, for example, making the consistency of a greenium also much more volatile.”

The greenium has been seen as a key factor in encouraging growth, with issuers more likely to choose the format if they see a primary market discount. A report put out by ING in April claimed that greeniums were “a baseline assumption” for issuers, although this was disputed by portfolio managers at T Rowe Price and Candriam.

There have been fears that ESG premia would disappear from the market entirely as supply grew to meet demand, but it shows no sign of vanishing even as sustainable debt accounts for around 15 percent of global issuance.

Among the AFME’s other findings were that secondary market activity spiked in June. Trading volumes for European ESG bonds have tended to be slightly down on their 2021 volumes over the past six months, but trading rose to just over €2 billion of trades a day in June, driven largely by the highest monthly levels of SSA trading since January 2020.