Sustainable bond ‘greenium’ rapidly declining, says report

Corporate bond 'greeniums' have "entirely disappeared" amid huge increase in sustainable bond supply

Sustainable bond ‘greeniums’ – the effective discount for an ESG-labelled bond versus a non-ESG benchmark – have seen a significant tightening in the past year, according to new research. 

A quarterly report on ESG finance published this week by the Association for Financial Markets in Europe (AFME) found that the greenium of Euro-denominated ESG and green-labelled bonds had tightened by 8bps from April 2020 to April 2021, dropping from 9bps to 1bps.

For corporate green bonds, AFME estimated that the greenium had entirely disappeared, with the greenium for Euro-denominated corporate green bonds close to 0bps, down from more than 20bps in May of 2020.

Julio Suarez, Director of Research at AFME, and author of the report told RI: “We have observed a significant increase in supply of green products.”  

“We are aware that some asset managers were struggling to find green compliant instruments, so it is possible they were willing to pay a premium in the absence of products in the market,” he added. “There has been an increase of supply, both of ESG and green products.”

According to figures from Moody’s, sustainable bond issuance – green, sustainability and social bonds combined – in Q1 of this year was more than three times Q1 2020, and was 19% higher than Q4 2020. There has been no corresponding increase in the wider bond market, with sustainable bonds representing 9.4% of global issuance in Q1.

The AFME report also shows a large increase in trading volumes. European ESG corporate bonds have broken daily trading volume records four months in a row in 2021.

Green bonds tend to be more expensive to issue due to increased auditing and framework costs, so a declining greenium could put corporates off issuance. 

“If issuers no longer continue to see a relative price advantage for issuing green instruments, it’s a possibility [that issuance growth could tail off],” said Suarez.

However, as the carbon price in the EU Emissions Trading System climbed above €50 per tonne at the start of May, “regardless of what happens with spreads, it’s possible that industries that need to comply with the allowances will need to continue to originate in order to [raise capital to] continue the transformation of the industry”. 

Despite tightening greeniums for corporate issuers, there is still significant investor appetite for green bonds, particularly sovereigns – Germany’s 30-year €6bn issuance yesterday priced 2bps below its conventional twin after an orderbook of €38.9bn, its highest greenium thus far, and the UK’s inaugural issuance planned for this summer is expected to attract similar interest. 

This week, South Korean internet firm Naver was able to cut 25bp off its initial price guidance for a $300m green bond reopening after strong demand from foreign investors, and Singapore real estate manager GLP raised its initial $500m target to $850m after the orderbook for its five-year green bond was more than six times oversubscribed.

In addition, research released today by CoreData based on a survey of global institutional investors found 45% were set to increase allocations to ESG bonds, jumping to 59% for European investors.