One of the most common objections to investing in green bonds has always been the “greenium” – the belief that investors must accept a lower yield for choosing a green bond over a conventional equivalent. For years, this was treated as an established fact of the market, the cost associated with the sustainability label. However, our latest research suggests the picture looks more nuanced. In the early years of the green bond market, a greenium did exist. Supply of green bonds was limited, demand from ESG‑focused investors was concentrated, and prices reflected that imbalance. But as the market has grown and diversified, the assumption that investors must sacrifice yield has become increasingly difficult to support. The question is not whether the greenium once existed, but whether it still does, and if so, where.
Photo credit: Amova Asset Management Europe Ltd.
By Amova
Asset Management Global Fixed Income Team
Most research into the
greenium has been methodologically narrow. A notable recent study examined
around 3,500 bonds, focused exclusively on euro‑denominated
investment grade debt, and covered only the last three years of market data.
Conclusions drawn from a sample that is constrained in scope risk reflecting
the parameters of the study as much as the market itself.
Our research team took a
different approach. Using ICE index data covering the entire USD 70 trillion
global bond market, our team built a dataset of approximately 2.1 million
observations collected on a monthly basis from 2017 onwards. The dataset spans
multiple currencies, with EUR‑denominated bonds accounting for around 60% and
USD bonds around 20%, with GBP, AUD and CAD making up most of the
remainder.Rather than looking at the market as a single aggregate, our research
examined the cross‑section of data across currencies, sectors, ratings and time
periods.
What the research shows
Our findings challenge the
conventional view of the greenium in several important ways:
-
Within
EUR‑denominated markets, green bonds often offer yields
comparable to or higher than conventional equivalents
-
Where
a modest premium has emerged in Europe, it appears concentrated in the period
from 2023 onwards and is likely linked to broader market conditions
-
In the
USD market, green bonds have consistently offered investors higher yields than
traditional equivalents
For
the USD market, the picture is clearer. Our research finds green bonds in the
US have consistently offered investors higher yields than traditional
equivalents across the study period. Investors have not been paying more for
the sustainability label, and in many cases, they have been paid more for
holding it.
Chart 1: Greenium by month and currency (negative values indicate higher prices or lower yields for green bonds)
What earlier studies may have missed
Many of the pricing
differences associated with green bonds may actually reflect broader bond
characteristics rather than the green label itself. Green bonds are often
issued by higher‑quality borrowers and therefore tend to carry lower coupons,
while lower‑quality issuers generally need to offer higher coupons and
wider spreads to attract investors.
Green bonds also tend to
have longer durations, which naturally leads to wider spreads because investors
are exposed to interest rate and inflation risks for longer. Other factors,
such as convexity, liquidity and volatility, also play an important role in
pricing. Once these structural factors are taken into account, evidence for a
consistent green premium becomes much weaker.
What this means for investors
The research suggests that
fears about giving up returns by investing in green bonds are largely
overstated. In the US, green bonds have consistently offered higher yields or
traded at lower prices than comparable conventional bonds. In Europe, green bond
yields have generally been similar to conventional bonds, with any recent
differences driven more by specific sectors and market conditions than by the
green label itself.
More importantly, any
remaining yield differences can be managed relatively easily through sector and
currency positioning. In some parts of the market, particularly in the US where
negative sentiment towards ESG has pushed green bond yields higher, investors
are actually being rewarded rather than penalised for choosing the sustainable
option.
Download the full guide
This article highlights only part of the evolving role of
sustainable fixed income.
Our full Sustainable Fixed Income Investment Guide
explores:
• The
impact of AI-driven energy demand
• The
growing importance of energy security
• Opportunities
across global sustainable bond markets
• The full
analysis of green bond pricing and portfolio construction
Download the full guide here to explore the complete investment case
Published by
Amova Asset Management Europe Ltd.
Amova Asset Management Europe Ltd.
