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Are green bonds priced differently from conventional bonds?

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Abstract

The young growing market for green bonds offers investors the opportunity to take an explicit focus on climate protecting investment projects. However, it is an open question whether this new asset class is also offering attractive risk–return profiles compared to conventional (non-green) bonds. To address this question, we match daily i-spreads of green-labeled and similar non-green-labeled bonds and look at their pricing differentials. We find that rating classes AA–BBB of green bonds as well as the full sample trade marginally tighter for the respective period compared to non-green bonds of the same issuers. Furthermore, financial and corporate green bonds trade tighter than their comparable non-green bonds, and government-related bonds on the other hand trade marginally wider. Issue size, maturity and currency do not have a significant influence on differences in pricing but industry and ESG rating.

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Notes

  1. Other regions apart from Canada and Europe did not collect data on asset allocation. Canada and Europe together represent more than 57% of sustainable assets (Global Sustainable Investment Alliance 2017).

  2. http://www.iigcc.org/publications/publication/2014-global-investor-statement-on-climate-change.

  3. Bloomberg tags bonds with a Green Bond label when the use of proceeds is dedicated to mitigating climate change and advancing environmental sustainability solutions. Within this study, the term green bonds always refers to green labeled bonds as defined by Bloomberg, the term non-green bonds to non-green labeled bonds.

  4. http://www.eib.org/investor_relations/press/2007/2007-042-epos-ii-obligation-sensible-au-climat-la-bei-oeuvre-a-la-protection-du-climat-par-le-biais-de-son-emission-a-l-echelle-de-l-ue.htm?lang=en.

  5. http://treasury.worldbank.org/cmd/htm/GreenBond.html.

  6. See https://www.climatebonds.net/standards/certification/get-certified.

  7. There is evidence that make whole calls may influence pricing of bonds (Mann and Powers 2003; Nayar and Stock 2008). Analyzed are groups of bonds only though, a “perfect match” of bonds of the same issuers with identical features has not been conducted yet.

  8. TRACE is FINRA’s Corporate and Agency Bond Price Dissemination Service that reports OTC secondary market transactions in eligible fixed income securities.

  9. See e.g. https://www.bloomberg.com/enterprise/content-data/pricing-data/for further explanation. According to Bloomberg BVAL provides transparent and highly defensible prices of fixed income securities across the liquidity spectrum. The methodology combines direct market observations from contributed sources with quantitative pricing models to generate BVAL evaluated prices.

  10. Bloomberg’s definition of i-spread: “I-Spread is the interpolated bond spread to a benchmark curve. The I-Spread is calculated by taking the interpolated, maturity matched yield on a benchmark curve, and subtracting that value from the selected bond's yield to worst. This differs from a standard benchmark spread, where the selected bond's yield is compared to the nearest already existing point on a curve, rather than an interpolated point.”

  11. For simplicity we use the expression i-spread in this study for both, the i-spread above the swap rate for the fixed rated bonds as well as the discount margin above the reference rate for the floating rate securities.

  12. http://www.eib.org/investor_relations/documents/eib-cab-factsheet.htm.

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Acknowledgements

We thank Florian Kiesel, Sacha Kolaric and participants of the Green Summit conference in Liechtenstein for valuable comments.

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  1. Technische Universitaet Darmstadt, Darmstadt, Germany

    Britta Hachenberg & Dirk Schiereck

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  1. Britta Hachenberg
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Correspondence to Dirk Schiereck.

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Hachenberg, B., Schiereck, D. Are green bonds priced differently from conventional bonds?. J Asset Manag 19, 371–383 (2018). https://doi.org/10.1057/s41260-018-0088-5

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