Evidence of 'greenium' grows as demand for green bonds outstrips supply

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New research has found evidence of a “moderate” greenium paid by investors in green bonds, as demand for sustainable fixed income continues to explode.

Mirova, an asset manager focusing on responsible investment, estimates that investors can expect to lose 2 basis points of yield when buying green bonds in comparison to non-green bonds, according to figures from January 2021.

This adds to a growing weight of evidence that shows green bonds commanding higher prices and delivering lower yields than conventional equivalents, with the Climate Bonds Initiative recently finding an increasingly visible greenium on bonds issued in the second half of 2020. 

The so-called greenium has been driven by rising investor demand for green bonds, which issuers are struggling to keep up with. 

Green bonds represent around 2 per cent of total bond market stock, but were responsible for almost 17 per cent of flows in 2020, excluding sovereign issuers.

“One cannot really talk about greenium without looking at the green bond market and the growing appetite of investors for it, and consequently, without taking into account the fact that demand far outstrips supply,” write portfolio managers Agathe Foussard and Nelson Ribeirinho. 

“The greenium currently appears to be moderate (as of 20 January 2021, 2 bp yield/spread). It is therefore difficult to talk about overheating or a bubble per se.”

The search for green bonds is intensifying as a number of funds are “suddenly converting” to socially responsible investing, which Mirova’s portfolio managers say reflects the “search for integrity that has become systemic”. 

“However, the transformation of funds into SRI funds is taking place much more quickly than the implementation of corporate sustainable development strategies and therefore the development of the green bond market, hence the supply-demand tension already mentioned.”

This is indicated by the fact that 26 per cent of Euro Corporate funds and 17 per cent of Euro-aggregate funds are now investing in green bonds, which account for less than 3.5 per cent and 2 per cent of the benchmark indices. 

However, Mirova cautions that there is “nothing homogeneous” about the current greenium, which was found to differ according to debt seniority and maturity, as well as the credit rating and sector of the issuer. Higher greeniums were associated with longer-dated debt, seniority, and better credit ratings. 

Differences were also noted across sectors. Certain sectors such as automotive, telecommunications and consumer, showed a “significant” greenium of more than 7 basis points, while real estate companies, chemical companies, certain industrial companies and transport companies showed a slightly negative greenium, in favour of the investor. 

“Accordingly, greenium are above all dynamic and therefore require constant monitoring if we are to reap their benefits in the management of our portfolios,” say Foussard and Ribeirinho.

Mirova sees the greenium as a “source of arbitrage opportunities”, noting the ability to carry out curve arbitrages between green and conventional bonds and vice versa.  

The portfolio managers also note that green bonds are “more defensive in composition” and outperformed during the market volatility in 2020.

Previous research from NN Investment Partners has also found that the Bloomberg MSCI Euro Green Bond Index outperformed the Bloomberg Euro Aggregate Index by about 0.30 per cent per annum since 2014.

“A greenium is not a foregone conclusion either. Today it is being fuelled by excessive demand, but it will eventually dissipate as the market grows in size,” write Foussard and Ribeirinho.

Mirova expects that 2021 to be “another year rich in green bonds”, predicting issuance will rise to USD550 billion in issues, an increase of 42 per cent on 2020.

The portfolio managers write: “The expected return to normal health conditions in 2021 should be a breath of fresh air for companies. They will be more inclined to issue green bonds in this context. In addition, stimulus packages aimed at financing the energy transition will probably be financed by "sustainable" bonds."

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Madeleine Taylor
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