Rising ESG Demand Has Helped Debt Issuers Lower Borrowing Costs

As socially responsible investment strategies gain popularity, new data shows that the influx of new money is starting to make an impact on green bond issuers.

For example, a growing body of research reveals that companies and governments that borrow using so-called green bonds are saving some money, the Wall Street Journal reports.

The market for these green bonds, which fund environmentally friendly projects like renewable power, is on the rise. Meanwhile, the new money inflows have helped push up prices and drag down rates on the bonds, making borrowing costs for issuers slightly cheaper. Meanwhile, analysts are witnessing a sort of ‘greenium’ or the little bit extra that investors are willing to pay for green bonds compared to traditional bonds.

Thierry Roncalli, a researcher at money manager Amundi SA, found that companies and governments selling green bonds saw a premium as large as a 0.11 percentage point, a modest amount but significant enough to meaningfully lower borrowing costs.

“Our results show borrowers get an advantage from issuing green bonds,” Roncalli, head of Amundi’s quantitative research department, told the WSJ.

The findings indicate that heightened demand for environmentally sustainable investments could now be significant enough to influence the behavior of corporate and government issuers. As the broader bond market rally dragged down borrowing costs to near-historic lows, investors with sustainability goals exhibited an increased willingness to lend to green projects at even lower yields.

“The greenium is a data point that shows the advantage of green borrowing to corporations, and it will encourage more corporations to enter the market,” Marilyn Ceci, global head of environmental, social and governance debt capital markets at JPMorgan Chase & Co., told the WSJ.

Roncalli found that as demand for risk management and trading opportunities shifted in a changing market environment, demand for ESG options have increased in the past three to four years.

“In 2015, 20% of the institutional investor requests for proposals we received required an ESG filter,” Roncalli added. “Today that figure is 70%.”

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