Green bonds: Different shades, same pricing


4 Jul 2022

Research on asset pricing in different shades of green bonds and the investor preference for them presents an interesting picture, but one that is open to debate, finds Andrew Holt.

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Research on asset pricing in different shades of green bonds and the investor preference for them presents an interesting picture, but one that is open to debate, finds Andrew Holt.

plant growing

A study that sought to unearth the pricing and ownership of the different shades of green bonds in issuance has been criticised for some of its findings.

The research undertaken by EDHEC, a business school, categorises these bonds as ‘dark green’ – those deemed to be the greenest of green – and ‘light/medium’, as well as conventional bonds.

And in terms of asset pricing, the research said: “It is not only the green label that does not have implications on the yield and price of the bonds, but also the shade of green is not reflected in differential pricing of sustainable fixed income securities.”

But Sean Kidney, chief executive of the Climate Bonds Initiative, contests this. “On straight comparative data, we see pricing differentials in green liquid currencies. Where you do not see differences in pricing is where you do not have liquidity. It is a function of liquidity to get the price discovery.

“And primary price differentials, where it occurs, is not driven by sentiment,” he adds. “It is not driven by investors saying this is green. It is paid for because of the secondary market: where there is liquidity you get price differential. And these bonds perform better in the secondary markets.”

The EDHEC research uses Cicero’s labeling definitions to explain the green bond market. “But the green bond market is not divided up this way,” Kidney said. “For example, they talk about light green bonds that use fossil fuels, but actually, you do not get those in green bonds. There has been a campaign to kill those off, and it has been successful.”

No greenium?

In the debate of the ‘greenium’ surrounding green bonds, the research is consistent with its initial pricing point. “By matching these green bonds with otherwise similar non-green bonds we find that there is no greenium for the dark-green nor for the light/medium green bonds.”

The report highlights that the premium for dark-green bonds increases over time, but it has been particularly penalised in 2020, possibly because of less investor focus on assets’ environmental footprint during the Covid-19 pandemic.

“I find the greenium point quite bizarre,” Kidney said. “Our data is quite different. And our anecdotal reporting is even more different. We speak to treasurers, basically everyone, and they get a greenium.”

The research does assert that institutional investors who report climate-aware investing, do hold more dark-green bonds in their portfolios.

On this point, the report said: “The shades of green do matter for climate-aware institutional investors even if the demand for dark-green assets does not translate into a tangible premium as far as bond pricing is concerned.”

These institutional investors have signed up to the United Nations’ Principles for Responsible Investment (UNPRI) and have a significantly higher ownership of dark-green bonds than of similar conventional bonds – about 16% more.

The light/medium green bonds do not feature significantly in the higher holdings of UNPRI investors meaning such investors are proving all in when it comes to a commitment to green bonds.

In turn, this result implies that UNPRI investors prefer to hold green bonds, and that they perform thorough due diligence and end up holding a significantly higher percentage of dark-green bonds.

Green switch

Although Kidney offers another assessment. “The bulk of demand is driven by mainstream vanilla funds that want to switch to green, wherever they can,” he said.

And he added that the focus needs to be different, and not particularly on pricing. “What we are concerned with is: what is a minimum requirement for investment to be consistent with the Paris Agreement?” he said.

In its own report, the Climate Bonds Initiative said of the green bond market: “We expect demand to continue to outstrip supply for the foreseeable future as funds seek to classify themselves as SFDR Article 8 or Article 9 in Europe, and US policy increasingly encourages accountability around responsible investments.

“However, as interest rates rise, bond prices generally fall, and while a lack of supply may temper the magnitude of the impact, a green label is unlikely to offer complete protection from this.”


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