Greenium in Sovereign Green Bonds

A Tool to Achieve the Sustainable Development Goals in the East and South Asian Nations

Abstract

The market for sovereign green bonds has grown exponentially from the pioneer issue by Poland in the year 2016 which have led to majority of the European Union member states to maintain a green curve alongside their conventional debt securities. The literature available report that the existence of sovereign greenium remains contested, and hence this paper has tried to estimate this premium using bond-level Z-spreads. Using the dataset from the LSEG Refinitiv universe of 2905 government debt securities, the study constructed a sample of 313 fixed-coupon bonds denominated in euros, issued by nine EU member states, viz. Austria, Belgium, France, Germany, Ireland, Italy, Lithuania, Netherlands and Spain. After controlling for remaining maturity, Bid-Ask spread and country-specific yield-curve shapes, green bonds traded at Z-spread of about 3.8 basis points lower compared to the conventional bonds of the same countries. The result was found to be significant in 12 of 14 alternative specifications and corroborated by three bond-level methods- higher for AAA/AA bonds (~ 5 basis points) and near to 1 basis point for Germany’s matched twin bonds. The greenium is economically small of about € 140 million a year but is positive and statistically significant. We contrast these results with India's Sovereign Green Bond programme and derive policy implications for country’s regulatory bodies.