The cost of being green

  • The market for "green bonds," whose proceeds are earmarked for environmentally beneficial purposes but are otherwise identical to unsecured issues, has grown tremendously in the past four years.
  • After starting almost exclusively as securities of global development banks and other government-affiliated institutions, the universe of green bond issuers has expanded recently to traditional corporates, including high yield issuers.
  • Investors are currently paying a premium to acquire green bonds, at least in the secondary market. Our model finds an approximately 20bp difference between the spread of green bonds and comparable issues, which we see as partly attributable to opportunistic pricing based on strong demand from environmentally focused funds.
  • Although the green bond universe is still a small percentage of the corporate credit universe at around $65bn, the influx of traditional corporate issuers (especially in light of the current spread discount), anticipated growth from emerging markets (including China and India), and increasing investor interest all suggest that the segment's growth will continue to outpace that of broader credit indices.

Ryan Preclaw, CFA
+1 212 412 2249

Anthony Bakshi
+1 212 412 5272