Governments and businesses that raise funds through green debt benefit from lower borrowing costs, so-called ‘greenium’, the latest sign of voracious investor demand for sustainable assets .
The price premium that these agreements impose highlights the rapid growth of the green debt market because it finances expenditure intended to support climate or environmental objectives.
“Anything with a green tag is basically bought,” said Mitch Reznick, head of sustainable fixed income at Federated Hermes.
Germany’s first green government bond, which is closely watched because the country’s debt market is considered a regional benchmark, has consistently traded above its conventional counterpart since issuance. in September. The yield on the Green Bund is now around 0.05 percentage point lower than its conventional ‘twin’, indicating that investors are willing to pay more for holding environmentally friendly debt.
Italy’s first sovereign green bond also valued last month at a slight bonus compared to typical Italian debt with a similar maturity, analysts said.
“Greenium is now a very well established concept,” said Philip Brown, global head of public sector and sustainable debt capital markets at Citi. In banks, even “the most cynical syndicate manager” organizing bond sales would create a greenium in their price expectations, he added.
Greenium can be difficult to analyze, as issuers typically do not sell green and conventional bonds with the same characteristics at the same time. But in a study on environmental debt issued in the second half of 2020, the Climate Bond Initiative found “growing signs” of the phenomenon.
Analysis of 54 corporate and government green bonds, which collectively raised $ 62.5 billion, found that the level of investor demand was higher than that of ordinary equivalents. The CBI also found that many of the bonds were priced more favorably than one would expect for issues of similar maturity.
“The sources of [green bond] demand is growing faster than sources of supply, ”making prices more competitive, said Caroline Harrison, senior research analyst at CBI.
Since prices typically depend on an issuer’s ability to repay debts, as well as market dynamics such as interest rates, the more favorable terms borrowers receive only for the green label could represent rates. irrational lending, some analysts have said.
“It’s not an alarming risk at this point,” but the need to fulfill sustainability mandates could lead to pricing errors, Reznick said. “It’s not that credit risk is being ignored; the price is not as precise. ”
Others worry about whether the green label still delivers on its promises.
“Green bonds are used by borrowers to profit from lower borrowing costs,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “I don’t see what a difference that makes at all. I’m not sure this has the impact people would like to see. Instead, he said, it might be more interesting to refuse to buy the debt of certain issuers or encourage borrowers to set higher sustainability standards.
Colin Reedie, co-director of global fixed income at Legal & General Investment Management, said supply and demand imbalances have led to unstable market bubbles in the past, while adding that he does not believe not that the green debt market was approaching bubble territory.
Green bonds sold in the primary market tend to have yields 0.1 to 0.15 percentage points lower than conventional bonds, which is still “not negligible” given the relatively low interest rate environment. low, Reedie said.
“Our policy is not to treat green bonds differently from vanilla bonds from the same issuer,” since the risk of default is the same regardless of the funding financed, he added.
The possibility of a green bond bubble is concerning from a risk perspective as it would damage the credibility of a large and relatively new market, said Emre Tiftik, director of sustainability research at the Institute. of International Finance.
But he pointed out that valuations have been stretched in debt markets in general due to huge volumes of central bank support linked to the pandemic. “If there is a [debt] bubble, it’s not driven by green bonds, ”he said.
Some analysts have said they expect greenium to fade over time as supply and demand have balanced and responsible investing has become the norm, rather than an investment category. .
Dominic Kini, credit and green bond strategist at HSBC, said sustainable debt is still growing and greenium is not a “bad valuation” but a function of supply and price. Demand: A growing group of investors who were required, or wanted, to allocate capital to sustainable activities were competing for a limited pool of assets.
In the near term, with investors eyeing the prospect of higher inflation, greenium could become more pronounced, Brown told Citi.
Bondholders have already started rebalancing portfolios and selling highly rated debt securities, pushing prices down, as the global economy recovers from the coronavirus shock. But green bonds will likely be “stickier” than vanilla bonds, and won’t be among the first assets to sell given their relative scarcity, he said. “We will see this greenium become more structural in the secondary market.”