Investment Institute

What is greenium and how does it work?

  • 01 March 2023 (5 min read)
Sustainable Bonds Series: Module 4 - What is greenium and how does it work?

In this module of our Sustainable bonds. In this video, we will look at greenium: what it is and why it is relevant to investors

When Austria issued its debut green bond in May 2022, it raised €4billion and attracted 25 billion orders1 . This demand led the bond to price at a slightly lower yield - about 2.5basis points -versus the existing Austrian conventional bond. This premium, known as a ‘greenium’, is a trend that has been materialising for some time, reflecting the imbalance between supply and demand.

It is not often that investors are able to see a clean comparison between a conventional and a sustainable bond but, by researching every segment of the green bond universe, we have calculated what should be the theoretical price of green bonds versus their conventional counterparts.

For example, focusing on euro green bond issuance, which provides the most comprehensive and less biased picture, we can clearly see that there is indeed a greenium, but it is not structural, and it is not equal everywhere.

Understanding the greenium puzzle

 Within corporate debt, there is a significant difference between sectors depending on the number of green bonds and issuers. Again, supply and demand dictate this premium: a sector like real estate, which has been particularly active over recent years and where investors can go elsewhere if the issue is considered expensive, has a lower greenium than a sector such as automotives where there are fewer options.

Paying a slight premium for a green bond may concern investors, however the market turmoil of 2022 has brought us some additional insight about the greenium dynamics. As credit spreads widen, greenium tends to increase, acting as a buffer against the general widening. This has helped to reduce the overall volatility of green bonds compared to conventional investors.

Therefore, green bonds investors should benefit from a better risk-adjusted return over the long term.

By providing potentially lower funding costs for sustainable projects, issuers are investing in the transition to a low carbon economy and should be better able to address the risks and opportunities that arise in a transitioning world.

Watch the other modules from our sustainable bonds series

The objective of this series is to make sustainable bonds investing simple to investors.


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