Green bond premiums: A comparison between the primary and secondary debt capital markets

University essay from

Author: Erik Engström; [2021-07-02]

Keywords: ;

Abstract: Could green bonds act as a relatively cheap alternative to conventional bonds when aiming to fund sustainable investments? An increased need to allocate funds towards carbon neutral projects in recent years has spurred a rapid growth of the green bond market. However, not enough evidence to support a consensus exists regarding the pricing of green bonds. By examining euro denominated bonds issued between 2015 and 2021, I find that the bond spread negatively correlates with the green labelling of a bond for larger corporate issued bonds, as well as banks in the primary market. I also find that this negative correlation follows through to the secondary market, albeit smaller, by observing the bond spread of the sample set three months after issue. Lastly, green bonds issued by corporates tend to display a greater negative green premium if the bond is externally reviewed by a secondary party. These findings suggest that green bonds can act as instruments to fund sustainable projects while not being financially disadvantageous, and instead potentially be financially beneficial compared to conventional bonds.

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