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📝 Focus

• Greenium Shrinkage?

📊 In the Markets

• Chuck's vote, € Peaking Interest

• Lulu strikes a Warrior Pose

📖 MoneyFitt Explains

🎓️ Bonds up, Interest rates down

📝 Focus

Greenium Shrinkage?

The “greenium” on green bonds has been shrinking over the last year as interest rates have risen sharply and investors demand higher yields, i.e. the interest rate you actually get at the bond price. The “greenium” is the difference between what a green bond yields compared to an otherwise similar conventional non-green bond. (The lower yield that investors are happy with to own greener debt translates into a higher price -or ‘premium’- that they are willing to pay for the bond🎓).

A recent study by economists at the Dutch bank ABN showed the greenium for corporate bonds traded in the secondary market has all but disappeared in the last half a year. But they also suggest it’s because markets have been rallying, and the greenium only increases when investors are in “risk-off” mode. (An IMF study, on the other hand, shows sovereign green bond greeniums to be very small but increasing over time, with a higher greenium in emerging markets.)

..... ▷ The first green bond was issued just before the Great Financial Crisis in 2007 by the European Investment Bank. It was then referred to as the ‘Climate Awareness Bonds’ (CABs), with proceeds from CABs meant for projects contributing to climate change mitigation. Whilst there are a few types of different green bonds, they primarily have the same goal of financing green projects of varying degrees. Many green bonds also come with incentives such as tax exemption and credits to attract more investors. As of January 2023, green bonds have raised $2.5 trillion globally, contributing towards green and sustainable projects. A notable example is the NextGenerationEU Green bond.

..... ▷ One of the most significant issues about green bonds is greenwashing. Greenwashing is providing false impressions, often to make a product sound more environmentally friendly than it actually is. According to the Hong Kong Monetary Authority, a third of corporate green bond issuers’ environmental performance deteriorates after the initial green bond issuance.

..... ▷ Over the years, many organisations and countries have stepped in to combat this issue with different frameworks and ‘rules’. For example, Singapore has its own green bond framework that is subjected to external review. This framework aligns with its national green goals as well as international guidelines and practices for green bond issuance. That said, these frameworks are all very much work-in-progress as loopholes can easily cause greenwashing to slip through the cracks of regulations. Many also criticise green bonds, claiming they do little to drive change in companies’ business models and environmental practices as the title is often just for show.

..... ▷ On a more macro level, certain shifts have also surfaced between countries. As the concept of green bonds started in Europe, it is currently the biggest borrower in green debt. However, that may change as China ramps up its green bond issues, and some expect Asia to issue green bonds at a faster rate than Europe. Regardless of region, the supply of green bonds will increase as governments continue promoting green bonds to advance their national climate goals.

Author: Alexis Kong, NUS Business School, 2024