Sustainable finance: The search for ‘greenium’ – ING Think

Executive summary

Being green: It’s not all about the money

Engaging in green finance requires extra effort, in particular for issuers; far more hoops to jump through relative to vanilla issuance. But there are clear benefits, and it’s not just about lower funding costs. It’s more about the messaging. Extra hours go in, but what comes out leaves a lasting impression, mostly a good one. We have some survey evidence.

The corporate premium in green finance T

here is a cost saving to issuing Green. It varies according to circumstances, but the baseline assumption now is for green yields to be below vanilla ones; not by much, but it’s persistent enough. It’s between 1 basis point to 10bp, with EURs drifting lower while the USD version is a tad more elevated. It reflects ESG scarcity, but also longevity.

The greenery in sovereign and SSA space

The funding advantage of green bonds is also a reality in the official sector, although discrepancies among issuers do exist. Due to their more prolific borrowing and abundance of green bonds, sovereign and SSAs offer our best opportunity to accurately measure this greenium. They also have a responsibility in ‘leading the way’ for private borrowers.

So what is a greenium and how do we get to it?

The existence of a greenium is mostly justified by higher demand for green bonds. We estimate the greenium for each curve separately, ensuring it is not polluted by other factors such as sector or maturity