Cash & Liquidity ManagementInvestment & FundingStudy reveals pricing benefits for green debt issuers 

Study reveals pricing benefits for green debt issuers 

Investors and issuers alike have much to gain from participating in the green debt market, according to a recent report by Climate Bonds Initiative

An analysis of sustainability-linked bonds (SLBs) by Climate Bonds Initiative (CBI) has concluded some issuers of the instruments enjoy a pricing premium on their issuance – the so-called “greenium” – compared to plain vanilla debt counterparts.

The “first of its kind” analysis involved CBI examining qualifying SLBs issued in 2021 and the first half of 2022 to determine whether there was evidence of a greenium.

Within the study sample of 37 SLBs, 14 achieved a greenium of which 11 were dollar denominated, and three euro denominated. Eleven of the SLBs obtaining a greenium were priced in 2021, and three in 2022. The research involved CBI, a not-for-profit organisation, constructing yield curves for each of the 37 SLBs.

The CBI says green bonds examined generally achieved larger book cover and strong spread compression during book building compared to their vanilla equivalents.

“These metrics undoubtedly contribute to tighter pricing for green bonds,” says CBI.

“While the high volatility of the first half of 2022 made it harder to pinpoint a greenium over the period, 20% of bonds were found to have priced inside their own yield curves. This demonstrates value for issuers.”

More broadly, CBI found that green bonds continue to attract higher demand than their vanilla equivalents in the primary market. Euro-denominated green bonds analysed were 3.1 times oversubscribed compared to 2.4 times for vanilla equivalents. Dollar-denominated issues were 3.8 times compared to 2.7 times for vanilla equivalents.

The findings also reveal that green bonds tightened in the immediate secondary market. After seven and 28 days, green bonds tightened by a larger magnitude than vanilla baskets and corresponding indices.

Green bonds were found to maintain better liquidity in the secondary market compared to their vanilla equivalents too, a finding CBI believes provides investors with flexibility as well as support “to justify their tighter pricing for green bonds in the primary market”.

green bond pricing

Bid/offer spreads are narrower for green bonds 

Strong momentum

Sector wise, more euro-denominated bonds from the real estate and utility sectors were green than not. EUR real estate bonds included in the analysis were among the strongest performers outright while in the utility sector, non-green bonds are now in the minority.

The CBI says strong definitions for green bonds in these two sectors have encouraged prolific issuance across them.

Sean Kidney, CEO of CBI, says that study results indicate that demand for SLBs remains strong and suggest investors are willing to support a broad range of issuers on their journey to net-zero.

“Investors are scrambling to finance the clean corporates of the future, and the corporate world need to take notice,” says Kidney.

“The sustainability linked-bond market has emerged with real momentum in recent years. The market offers a great outlet for high emitters to cut climate impact, but commitments must be ambitious”

Ashley Serrao, head of treasury and investor relations at rates, equities and credit trading platform Tradeweb, which contributed secondary market data for the CBI study, says his company is seeing continued momentum in green bond trading, with institutional investors increasingly seek out more flexible, sustainable and liquid investment options.

“When analysing European credit bonds in the real estate and utility sectors in the first half of 2022, for example, we saw that bid/offer spreads were tighter for green bonds versus their vanilla counterparts, suggesting that green bonds are being more competitively priced,” says Serrao.

The CBI predicts that the encouraging, positive pricing dynamics for green bonds revealed by the study will continue given stiffening emissions regulations and an increased emphasis on responsible investment.

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