Green bond issuers held onto their ‘greeniums’ throughout the second half of 2021, according to the latest figures from the Climate Bonds Initiative (CBI), with half of Euro and Dollar-denominated deals issued over the period pricing on or below the yield curve.
CBI was able to build a yield curve for 34 green bonds in its sample, of which 17 priced on or below the curve. The data indicates that, despite concerns that the pricing advantage for green issuers was waning, investors continued to pay a premium for the label.
US food company Mondelez saw three of its green bonds price below the curve, as did telecoms firm Verizon, and Dominion Energy.
“We still simply don’t have enough data to make an assessment of where green bonds should trade relative to their non-green counterparts” – Nuveen’s Steve Liberatore
There was a reduction in deals securing a greenium as the year ended, with just three out of 18 transactions seeing pricing benefits in the Q4 sample. However, CBI said that this reflected wider caution from bond investors in the face of looming interest rate hikes, rather than their sentiment towards green bonds.
Concerns have been raised over the survival of greeniums in the bond markets since a trio of reports in Spring 2021 found they had been on the decrease since 2020. Green bonds are generally more costly to issue than conventional debt due to increased reporting and external assurance costs, and greeniums allow for these costs to be offset by a reduced cost of capital, as well as incentivising green spending by issuers.
While the proportion of deals experiencing a greenium was down on the first half of the year, which saw investors pay up for 76% of green bonds, average oversubscription increased for Euro-denominated bonds. The average Euro-denominated green bond was 3.4x oversubscribed in the second half of the year, while the average oversubscription for Dollar-denominated bonds was 3x. These figures were both higher than average oversubscription for vanilla bonds, which stood at 2.7x for both currencies, and an increase for Euro-denominated bonds, which were 2.9x oversubscribed on average. The Dollar oversubscription however fell from its record 4.8x in the first half of the year.
German development bank KfW, Spanish conglomerate Acciona and Auckland City Council were among the big winners in terms of orderbooks, each achieving more than 7x oversubscription for their green bonds, while interest in their vanilla equivalents hovered around 2.5x.
Steve Liberatore, portfolio manager and head of ESG/Impact for global fixed income at US-based asset manager Nuveen, warned against drawing inferences from orderbook size. “Subscription levels are inherently unverifiable and are widely considered not to reflect actual underlying demand”, he said. “We still simply don’t have enough data to make an assessment of where green bonds should trade relative to their non-green counterparts”.
There has been fierce debate over recent years about whether there is credible evidence that investors pay more for notes with a green label. Some observers have noted that the increase in dedicated green bond mandates means a growing number of investors have become forced buyers of a concentrated number of deals, pushing the prices up regardless of the financial characteristics of the offering. Others argue that a greenium is justified in some cases because the green label can be a proxy for good management, increased disclosure and long-term strategy at an issuer.
Liberatore said Nuveen had not seen a “systemic greenium” in the market, and that the $1.3 trillion manager had emphasised to issuers that they should be motivated by the other advantages to labelling bonds, including the potential to broaden their investor base and demonstrate their willingness to address environmental concerns.
However, Tatjana Greil-Castro, portfolio manager and co-head of public markets at fixed-income investor Muzinich & Co, said that the advantages of a green bond in the secondary market could justify paying a higher price at issuance.
“Whether the greenium is a positive or a negative should not only be assessed in terms of absolute yield/spread but also if these green bonds show less volatility than their non-green counterparts. Lower volatility in a green bond could justify a lower yield and still might offer a superior risk/reward characteristic.”
To read the full report from CBI, click here.