Green Bonds' Premium & Sustainability-Linked Debt

IN THIS PUBLICATION:

• Greenium, the price premium paid by investors for green bonds, represents how willing investors are to pay for sustainable finance instruments over their standard counterparts.
• Sustainability-linked instruments are a new addition to the sustainable finance world and help more companies get rewarded for setting neutral or positive impact targets.
• Greenium is a useful indicator but like most new innovations in this space, has many shortcomings.

Greenium - How Does It Work?

Greenium is at the core of the discussion around the issuance of sustainable finance instruments. It reflects how much appetite there is from investors to accept a price premium (i.e. a lower yield) for a green bond in comparison to a conventional issuance.

Issuers pay close attention to the greenium as it allows companies to raise funds at a lower cost if they think green, even if funds raised come with covenants that constrain their use. (So no Michael Saylor Bitcoin leveraging going on… at least not until this crypto energy debate is finished once and for all)

Greenium is calculated as the difference between yields of green and conventional bonds, which in financial jargon is simply called the 'spread'. That spread exists mainly because green bonds are perceived as less risky than conventional bonds. Why?