What's in a Greenium: An Analysis of Pricing Methodologies and Discourse in the Green Bond Market

Abstract

Whether green bonds deliver a cheaper cost of capital to issuers than vanilla bonds has been a contentious issue since the start of the green bond market. In the market’s early days anecdotal statements from green bond issuers that their bonds were being oversubscribed, resulting in a pricing difference against equivalent vanilla bonds, led market participants to argue that green bonds provide a cheaper cost of capital. However, this anecdotal evidence was unverifiable until the market matured to a size sufficiently large enough to provide comparable bonds for analysis. The existence of a “greenium,” a green bond premium over equivalent vanilla bonds, became a key research point for green bond analysts as the market matured. This analysis spread to sustainable finance research centers and bond trading desks and has now become a mainstay topic of green bond conferences and market events. Within academic circles, numerous papers have recently focused on looking directly at pricing differences in the U.S. green municipal-bond market. However, these discussions have yet to provide conclusive evidence for or against the presence of a substantial greenium. The academic debate remains focused on refining a standard methodological approach by which to detect any greenium. Developments such as the green halo effect, which blurs the added value of green bonds for issuers by blending it with the issuer’s vanilla bonds, also make the academic search for a greenium insubstantial in relation to the green bond market’s overall dynamics.

Drawing from the social sciences of finance, this paper contextualizes green bond pricing research by examining recent greenium discussions and the role of the Climate Bonds Initiative (Climate Bonds) in these discussions. We reflect on the beginning of the first green bond pricing research at Climate Bonds and analyze how these early conversations have evolved among both academics and market participants. Drawing from literature review, quantitative pricing data, and qualitative data from semi structured interviews with market participants, we argue that the iterative nature of pricing discussions is a result of both pricing methodologies and market growth dynamics.

Keywords: Sustainable Finance, ESG, Green Bonds, Climate Bonds, Sustainability, Responsible Investment, Fixed Income

JEL Classification: G3, O16, Q01, Q2, Q3, Q4, Q54, Q56