Deciphering Greenium: the Role of Investor Demand

Abstract

Using security-level bookbuilding data, we analyze the pricing and demand for green bond offerings (GBOs) compared to their conventional counterparts. We show that greenium arises from ESG-focused investors' almost exclusive demand for GBOs. GBOs receive a much larger order book size, enabling underwriters to compress their offering spreads more. Moreover, underwriters compress the offering spread more aggressively for GBOs than for their conventional counterparts at the same level of investor demand, suggesting that ESG-focused investors are less price sensitive. These results hold when we proxy for ESG-focused investors' demand for an offering in the primary market using their holdings of similar bonds in the secondary market. Our findings imply that greenium hinges on the realization of investor demand. Further analyses rule out the temporary price pressure or liquidity preference explanations. Our study provides direct evidence from the primary bond market to support investor-tastes models.

Keywords: Green bonds, primary market, ESG investing, investor demand, investor tastes, price sensitivity, greenium

JEL Classification: G12, G14, G23, G24, G30