Some of the biggest and highest rated green bond issuers have been losing their greeniums — and they are not happy about it.
Longstanding observers of the green bond market may allow themselves a little smile. A few years ago, it was taboo to mention the greenium. Everyone pretended it did not exist, for fear of putting off investors.
Later, when the evidence became too strong to ignore that green bonds were often priced more tightly than ordinary ones, issuers would loftily insist that they were not issuing green bonds to get a pricing advantage, but to do the right thing, or for investor diversification.
But privately, many were glad to save a few basis points. It helps to offset the costs of establishing and maintaining a green bond programme. Public sector issuers, in particular, quite rightly have to justify every penny of spending.
When it was clear investors were not being put off, the market accepted the greenium as a topic fit for polite conversation, and acknowledged the obvious: since green bonds offer investors something extra, they may often be willing to pay a little more for them. Issuers may be able to harvest some of this bonus at new issue, and that incentivises more issuance from both existing and new green borrowers.
But it is now time for another reckoning with reality. Issuers have got to understand that the greenium cannot be relied on as a stable quantity, any more than new issue premiums can.
It is caused by green-minded investors having a particular need for green bonds, which makes them more desired than other bonds.
It will be natural to see greeniums stabilise or compress if green bond issuance becomes less scarce, compared with that dedicated demand.
Arguably, it could even be a good development in the market — when green bonds are treated more like a mainstream product, rather than a novelty that investors are willing to pay up for.
Green bonds are typically seen as a defensive product for investors, since the demand from green funds tends to be more sticky. In turbulent times, green bond pricing can be a bit more stable, creating an argument for there to be a greenium in the first place.
But it is also true that, during periods of volatility, investors tend to demand higher new issue premiums from all issuers, and are keenly focused on bonds’ financial performance. So, it is not surprising to see greeniums diminishing at such a time.
Moreover, the greenium will always be issuer-specific. Green bond funds may have no objection to sovereign green bonds from the UK, France or Germany, but just have plenty of them already. In such circumstances, they will be less likely to pay a greenium to buy more.
But if a corporate debut issuer comes along that would diversify their portfolios and offers an attractive spread, that may catch their eye and make them covetous. Several financial institutions have enjoyed keen demand for green bonds recently, which bankers thought had helped them price tightly.
So, it is time to accept that the greenium is real and logically well founded, but that it will naturally fluctuate according to conditions in the broader market and the specifics of the issuer.
In the primary market in particular, where the size of the greenium on any deal has always been a matter of interpretation, there will be times when it is easier to crystallise and other times when it is incredibly difficult.
The fluctuation of greeniums is part of a normally functioning market, and the market needs to come to terms with that. After all, the greenium should only be an extra incentive to print green bonds, not the primary reason.