The investors underpinning the greenium
New research has identified one of the sources of the ‘greenium’ seen in green bond issuance among institutional investors, especially pension funds and mutual funds. The study used a database of European bond holdings and compared the sensitivity of different types of investors to changes in market conditions. Among the investors studied – the database used included only European investors – mutual fund and pension fund investors were less likely to sell green bonds in response to changes in price than were banks and insurance companies.
The price inelasticity suggests that they value green bonds for reasons other than financial returns and are willing to maintain their holdings in the face of short-term financial losses. By contrast, banks and insurance companies showed sensitivity to price fluctuations of green bonds more in line with non-green holdings, showing more focus on financial returns, or putting less of a premium on holding green bonds.
The impact on the bond market from the perspective of issuers is that there is a significant share of investors who value the ‘green’ characteristics of green bonds. There are many potential reasons why investors would show different behavior with their holdings of green bonds. They could view them as a hedge against their climate risk. Or they could be expressing non-financial values in their investors who prefer investments that will be more conducive to a future where climate change is successfully mitigated.
The green bond market in Europe has reached the point of being quite well developed, including with central bank policy shifts to allow green bond purchases in their asset purchase programs. A measurable presence of market-wide evidence of the source of the ‘greenium’ suggests that it is likely to persist. This is good news for issuers in other markets at an earlier stage of green bond market development. Evidence from Europe suggests that the ‘greenium’ may be persistent, and not just a passing stage for an inefficient market that fades over time.
A persistent group of investors whose actions demonstrate lower elasticity in their response to price movements of green bonds compared to their holdings overall provides one source of financial incentive for issuers. If a greenium is persistent, it could provide a small but noticeable financial incentive for green issuance.
As issuance of green, social, sustainable and sustainability-linked (GSSS) bonds and sukuk has dropped in the face of higher interest rates, evidence of a durable ‘greenium’ could provide a realistic source of optimism that bond markets will continue to be supportive of investments in the climate transition, even if not currently at the scale needed.
