Is there a green bond premium?

Is there a green bond premium?

Olivier David Zerbib, a PhD candidate in environmental finance, has just published a paper on the effect of investors’ pro-environmental preferences on bond market prices in the Journal of Banking and Finance (*). Below is a summary of the main takeways of the article.

The main takeaways are:

  • Investors’ pro-environmental preferences have a low impact on bond prices:
  • Pro-environmental preferences induce a negative yield premium of 2 bps on average.
  • The main determinants of this premium are the rating and the issuer type.
  • The results suggest that:
  • A 2-bps negative yield premium should not be a disincentive to keep on investing in green bonds.
  • The yield differential between conventional bonds issued by similar companies with different environmental performances should be predominantly due to a difference in risk rather than to the effect of non-pecuniary motives.

(*) Zerbib, O.D., The effect of pro-environmental preferences on bond prices: Evidence from green bonds, Journal of Banking and Finance, 98:39-60, 2019

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