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02-02-2021 14:21

A closer look at green bond premiums

Do green bonds perform better than non-green ones? Andreas Zsiga, chief analyst in Nordea Credit Research, recently examined that question. He discusses his findings and the outlook for green premiums going forward.

The green bond market has grown significantly during the last couple of years, hitting a new global supply record in 2020. Analyzing the potential price difference between green bonds and non-green bonds requires a critical mass of companies issuing both green and non-green bonds. Until now, the green bond market has provided too few data points for such a comparison. However, that’s changing, with accumulated supply for 2020 topping 3,400 green bonds issued.

Andreas Zsiga, Chief Analyst, Industrials and Utilities, Nordea Credit Research

Investor demand inspires testing (once again) for green premiums

The increased interest from investors for green bonds during the last couple of years sparks the question: How do green bonds fare compared to non-green bonds? The dramatic growth in the green bond market has provided a critical mass of data points, with multiple examples of issuers with both green and non-green bonds outstanding.

Andreas Zsiga, Chief Analyst for Industrials and Utilities in Nordea Credit Research recently tackled the question of pricing in the green market versus the non-green market.

“We have seen indications that green bonds tend to have tighter spreads but have not previously seen a study on this. With the increased number of green bonds in the market from issuers with ordinary bonds issued as well, we saw an opportunity to examine this,” Zsiga says.

The report looks at secondary market spreads for corporate investment grade issuers with both green and non-green bonds outstanding, with comparable bond tenors. The study compares the existence of green bond premiums in three different groups: EUR bond issuers with a credit A rating, EUR bond issuers with a BBB credit rating and a sample of SEK issuers with an investment grade rating.



Outperformance for EUR A and EUR BBB but not SEK

According to the report’s findings, for more than 60% of the issuers in the EUR A category, green bonds outperformed the non-green bonds in terms of bond spreads. For the EUR BBB sample, 60% of the green bonds performed better than the ordinary bonds, while there was no evident difference in the SEK-market.

Zsiga says that, in terms of the EUR market, the outcome of the study was quite expected, given the increased focus on ESG from investors and the growth in the number of dedicated green bond funds, driving demand for the format.

“What was more surprising was the absence of a difference in SEK IG bonds,” he says. “Many Nordic investors are ESG focused and have a demand for green bonds, and we thought that the green bonds would perform better also in the SEK-market.”

The relatively small sample size still makes it difficult to identify the existence of green bond premiums, Zsiga cautions.

“The numbers send a clear indication of a green bond premium for EUR A and EUR BBB issuers, but the period of investigation is quite short and at this point it’s impossible to know if this is a temporary trend or if the green outperformance will continue to disadvantage non-green bond issuers,” he says.

Green outperforms during Covid-19 risk-off period

The Credit Research report further concludes that green bonds seem to have performed better than ordinary bonds by the same issuer during the Covid-19 risk-off session. This is also the case when comparing to the broader bond market. This corroborates the analysis conducted by Sustainable Finance Advisory in May, where we found indications of a green premium in the secondary market during the risk-off period due to the corona outbreak.

The conclusion we reached then for why green bonds fared better than non-green bonds still holds now. The combination of long-term and stable issuers of green bonds, the automatic exclusion of non-green companies hit hardest in past crises, as well as the characteristics of green bond investors and the growth in the number of dedicated green bond funds, are all potential reasons for why green bonds have performed better than traditional bonds during major risk-off periods.


Ebba Ramel is an analyst in Nordea’s Sustainable Bonds team.

Jacob Michaelsen is Head of Sustainable Finance Advisory at Nordea.