Corporate Green Bonds: Understanding the Greenium in a Two-Factor Structural Model

Abstract

A novel structural model is developed to understand the determinants of green bond prices and the so-called ‘greenium’, that is, the premium that bondholders are willing to pay to invest in green securities rather than conventional ones. The presence of a greenium makes green bonds relatively cheap vehicles to fund environmentally sustainable projects and thus contributes to the shift to a green economy. Yet, evidence on the greenium is mixed and the determinants of green bond yields are not fully understood. In this model two sources of uncertainty are introduced, that is, of cash flows of the firm and of the effectiveness of the financed green projects. The adoption of two risk factors brings in some mathematical complexity but allows for a better modelling of the multi-facet nature of these financial instruments. Our model is rich enough to generate both a positive and a negative premium, as both have been detected in the empirical literature. Thus, we shed light on possible heterogeneity concerning the existence of a greenium in the green bond universe. Moreover, we show how green bonds affect the issuer’s creditworthiness, depending on the correlation of the green project with the core business of the firm and study their impact on investors’ portfolio allocation.

Does better environmental, social, and governance induce better corporate green innovation: The mediating role of financing constraints

“…In order to fund green projects, firms have attempted to use green financial instruments to broaden financing channels, such as issuing green bonds, especially in industries where the environment is financially material to firm operations (Agliardi & Agliardi, 2021). In this regard, issuing green bonds can not only lower the cost of capital for projects with environmental benefits (Tang & Zhang, 2020), but also enable those firms that announce they are issuing green bonds to experience an increase in ownership by long-term and green investors (Zerbib, 2019).…”

Climate Change, Green Finance and Economic Growth

“…Without doubt, all the entities should obey the basic principles and rules, in order to make a sustainable life. Agliardi, E. and Agliardi, R acknowledged that since 2007, the first issuance has coined as a key finical tool to address the new challenges, which presented the benefits of directed environmental project primarily climate change mitigation and adaption [11]. With the deceasing amount of GHG, the global warming led by GHG would be mitigated.…”

Spread Analysis of the Sustainability-Linked Bonds Tied to an Issuer’s Greenhouse Gases Emissions Reduction Target

“…The studies focus on the benefits of green bonds in terms of bond market premium [18][19][20] identifying a small bond market premium for green bonds compared to that of conventional bonds [11]. The structural model for the premium paid by bondholders for green bonds when compared to that of conventional bonds (so-called 'greenium') was forged by E. & R. Agliardi [21].…”

“…We propose to call it 'ESG spread'. A negative spread is regarded favorably by issuers because it can lower their funding costs (and all without rigorous funding allocation constrains as with green bonds), while investors will receive a slightly lower yield compared to existing similar bonds [21]. A common explanation for the greenium is that environmental factors are increasingly integral to the investment process.…”