The global green bond market continues to grow at a strong pace amid demand from the investor community. While still constituting less than 1.5% of the total tradable bond universe, thus far in 2021 green bond issuance has more than doubled to over €320 billion, and the universe is set to exceed €1 trillion in 2022. Previously dominated by supranational, agency and utility sectors, the market is now more diversified, with financials and sovereigns constituting more than 40% of recent deals. As products develop, investors should be sensitive to the premium they pay for holding green debt.
In government bonds, estimates of a green premium (“greenium”) range from two to nine basis points.1 We believe that short-dated, more seasoned securities tend to have higher greeniums, while more recently issued long-dated bonds trade closer to conventional debt.2 The likely explanation is supply dynamics: New green issuance in the space tends to have longer maturities, with recent issuers, the EU and Italy, choosing 15- and 25-year bonds, respectively. Growing supply has not prevented greeniums from increasing over time. Our observation is that most green government bonds now trade richer to conventional equivalents than at the time of the primary issuance.
In corporate bond markets generally, greenium estimates vary in a wider range of 0 to 25 basis points, with an average of around five. Relative to government bonds, corporate greeniums increase with maturity. In addition, higher-yielding, lower-rated bonds tend to have significantly higher premiums, often in excess of 0.1%.3 A lack of higher-yielding securities within the green bond indices, such as The Bloomberg MSCI Green Bond Index, is likely the main reason for this phenomenon.
The euro-area covered bond market is an interesting example of a sector with a low greenium. Low average yield on securities and the prevalence of official institutions in the market result in a minimal greenium for the sector.4
Going forward, we expect green bond premiums generally to expand. Regulatory initiatives such as sustainable finance disclosure and EU taxonomy regulations will further strengthen investor interest in the market. While robust supply of green bonds is set to continue, the emergence of sustainability-linked bonds is likely to divert corporate issuers away from green-labeled instruments, which are more restrictive in nature. Finally, the shift of central banks’ balance sheets toward green investments is a potentially major change in the development of the market.
