The future is green : How the greenium of corporate bonds evolve over time and what factors impact yield

Abstract: Background: The impact of climate change on people's health and lives is a growing concern, with viruses, malnutrition, and heat stress potentially causing up to 250,000 deaths per year between 2030-2050. To address this issue, organizations and institutions are taking action to create a more sustainable world. One major step was signing the Paris Agreement in 2015, and financial investors have also taken on greater responsibility for the environmental transition. In response, green bonds have become increasingly popular. The key difference between a green and conventional bond is that the green bond is issued with the specific purpose of financing green projects. However, investors are still unsure about the financial performance of green bonds compared to conventional bonds, as the costs of issuing them may impact profitability and economic benefits. Purpose: This report examines how the premium on green corporate bonds, i.e., greenium, evolves over time. The main objective is to assess the performance of green bonds compared to conventional bonds in terms of yield to maturity and the impact of a bond’s green label. To gain a thorough understanding of the development of greenium over time, it is important to examine the factors that influence the yield differences between green and conventional bonds. This analysis of the existence and evolution of greenium and its driving forces can offer valuable insights to investors interested in sustainable finance and green instruments. Method: This study analyzed 267 green corporate bonds and 3,997 conventional corporate bonds issued globally between 2015-2022. The greenium was calculated by comparing green and conventional bonds' average yield to maturity. Additionally, three OLS regressions were conducted to assess the impact of a bond's green label and factors driving the yield to maturity of both green and conventional bonds, respectively. The regressions included control variables such as green label, issuer rating, time to maturity, seniority, and local currency. Conclusion: After analyzing the results, we found that conventional bonds performed better in yields than green bonds over the entire sample. However, in specific individual years, the green bonds outperformed the conventional bonds, indicating that the greenium is not negative each year separately. Regardless, conventional bonds generate higher yields over the whole sample period, implying that greenium exists. The green label does not significantly influence the variance of bond returns in all time periods, suggesting that investors' preference for environmentally friendly bonds is inconsistent across the entire sample. Additionally, the determining factors for conventional bonds are more predictable than for green bonds, and the future events of green bonds can be challenging to forecast due to the larger variation in the effects on yield to maturity.