Green bond issuers have enjoyed a premium from socially conscientious investors who have been willing to give do-good companies a helping hand, but as the market for socially responsible fixed income assets booms, the so-called “greenium” is beginning to shrink.
According to Moody’s, $450 billion in green bonds is projected to be issued worldwide in 2021, compared to around $300 billion last year, the Financial Times reports. The increased supply should help relieve the scarcity that made green debt so sought after among a fund management industry that is proactively showing it is investing in accordance to environmental, social, and governance principles.
Meanwhile, fixed income investors are starting to question the logic behind paying more for a “green” label, pointing out that there are better ways to incentivize sovereign or corporate borrowers to pay for environmentally friendly endeavors.
“We always evaluate an issuer in its entirety, not just one bond,” Madeleine King, co-head of global credit research at Legal & General Investment Management, told the Financial Times, adding that it makes little sense to pay a premium for green bonds compared to normal debt from the same company when the creditworthiness and sustainability credentials of the issuer are the same.
“We would have given up a couple of basis points [of income from the bond] essentially for nothing,” King added.
According to data from the Association for Financial Markets in Europe, the so-called “greeniums” are shrinking in Europe’s corporate debt market, which remains one of the biggest markets for green debt issuance. Spreads between ESG corporate bonds compared to “non-sustainable” or conventional debt have narrowed to less than one basis point in recent months after widening to as high as nine basis points last year. However, green bonds in the sovereign markets, where this type of debt is more scarce, continue to enjoy a higher premium.
Some bond investors have pointed out that green debt, which typically changes hands less often then traditional bond assets, could hold up better in market downturns, which should help make up for some of the green premium.
“In periods that are more challenging for fixed income markets, green securities tend to [fall less sharply in price],” Scott Freedman, a portfolio manager at Newton Investment Management, told FT. “They have stickier holders.”
However, Freedman cautioned against buying green bonds indiscriminately, especially if an investor is sacrificing performance just to be green.
“We are not interested in buying a bond for the label,” Freedman added. “We are not mandated by our clients to accept lower returns.”
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