The Benchmark Greenium

Abstract

Exploiting the unique "twin'" structure of German government green and conventional securities, we use a dynamic term structure model to estimate a frictionless sovereign risk-free greenium, distinct from the yield spread between the green security and its conventional twin (the green spread). The model purifies the green spread from confounding and idiosyncratic factors unrelated to environmental concerns. While the model-implied greenium exhibits a significant relation with proxies of shocks to climate concerns---and the green spread does not---the green spread correlates with stock market prices and measures of flight-to-quality. We also estimate the greenium term structure and expected green returns.

Keywords: ESG, green bonds, dynamic no-arbitrage models

JEL Classification: G12, Q51