Green vs. Social Bond Premium

Abstract

While responsible investors consider that the environmental and social pillars are highly interconnected when implementing ESG and climate strategies, our research shows that the green and social bond markets are not integrated. Indeed, we notice that the social bond premium is not positively correlated with the greenium. On the contrary, we found a negative long-term relationship between the two premia. If we consider a dynamic analysis, we observe that the premia are highly time-varying. On average, the greenium is about -3 bps while the social bond premium is not significant and close to zero. These results indicate a behavioral difference between the primary and secondary markets. This is particularly true for social bonds that had a positive premium last year. More generally, the level of these two premia (especially the social bond premium) are a long way from reflecting the major concerns about a just transition to a low-carbon economy, and the financing dimension of net zero policies.

In this research, we also highlight the differences between green and social preferences in terms of bond pricing. First, there is a difference between green and social projects when they are financed in euros or other currencies. Clearly, non-euro projects are subject to a higher premium. We also observe that the level of the greenium is related to the credibility of the green project. In line with other academic studies, we confirm that certification, external review and the SDG dimension impact the greenium as expected by the signal theory. On the contrary, it is more difficult to understand the pricing in the social bond market since empirical relationships between the social bond premium and extra-financial factors are missing or seem counter intuitive. Therefore, we can assume that investors consider social bonds to be more conventional instruments than green bonds.

Keywords: Sustainability, green bond, social bond, ESG, climate risk, risk premium, greenium, preferences

JEL Classification: G12, Q5