“Green Bonds” are bonds issued to fund an environmentally friendly or beneficial project. Bond issuers attach the “green” label on bonds in hopes of receiving a lower interest rate than they would otherwise. This once-theoretical benefit to issuers of Green Bonds is thought of as a Green Bond premium or simply a “greenium.”
Over the past four years, we have kept an eye on the benefits that Green Bonds offer borrowers. Back in 2017, when the concept of Green Bonds was rather novel, we noted that this “greenium” or lower interest rate had not yet surfaced. Two years later in 2019, the financial benefit to borrowers was still not apparent, and we wondered whether a beneficial interest rate to “Green Bond” issuers would ever appear. As we previously noted, in the absence of a financial benefit, Green Bonds still offer issuers an opportunity to: (1) signal to policy makers of the need for environmental project funding; and (2) signal to other stakeholders the issuer’s positive involvement in the environment. In 2020, research out of Boston University noted these “signaling,” non-financial benefits and found that by issuing Green Bonds, bond issuers can “credibly signal their commitment towards the environment.”
Fast Forward to 2021. Barclays examined Green Bonds in detail and found that their financial benefit is finally surfacing. Barclays noted that Green Bond issuers have “long been able to get cheaper funding through the utilization of the green label.” This financial benefit is indicative of buyers taking advantage of the need to fund environmental projects and the robust demand for Green Bonds. By mid-2021, a record of $411 billion in Green Bonds had already been sold (compared to the $234 billion raised by Green Bonds in all of 2020). The high demand for Green Bonds is causing investors to accept a lower yield.
Barclays expects Green Bond issuers to receive the benefits of a greenium of “four to five basis points over the medium term, assuming issuance remains elevated.” The record issuance of Green Bonds in 2021 has not affected the financial benefit to issuers, as cheaper funding only shrunk marginally by just 1 basis point from the peak of 5 basis points in early 2021. The typical purchasers of Green Bonds are investors of the buy-and-hold variety, like pension funds, asset management arms of insurance companies, and mutual funds (as opposed to active traders). Barclays advises holders less concerned about the “green” label to swap their Green Bond holdings for “non-green” bonds, because of their lower yield.
This recommendation by Barclays shows how purchasers of Green Bonds are willing to accept a lower yield to promote environmentally beneficial projects. As the issuance of Green Bonds has increased and gained popularity, the financial benefit to issuers has become undeniable. There now seems to be a real benefit for a bond issuer to use the Green Bond label for projects beneficial to the environment. For entities seeking to fund projects with an obvious positive environmental impact, Green Bonds have blossomed into a beautiful possibility.
(If you wish to learn more about the process and potential concerns of labeling bonds, then you are in luck. We will soon be releasing a separate blog post addressing the practical issues of labeling your Green Bonds and the separate compliance issues.)
The financial benefit and the opportunity to signal to policy makers, other stakeholders, and the community at large makes Green Bonds an attractive option for the funding of projects that positively affect the environment. Issuing Green Bonds can boost a government or corporation’s reputation and steer the entity onto a path of protecting and benefitting the environment, while simultaneously providing cheaper funding.
The principal author of this post is Will Swain. Please click here to learn more about our public finance practice, and click here for our disclaimer.