The greenium – or green premium that borrowers can secure by issuing green and sustainable bonds – continued to expand in the second quarter despite a surge in ESG-labelled bond issuance, and is also increasing as a percentage of spread, according to research by Natixis.
The financial benefits of issuing green debt over conventional debt was also reinforced by French real estate firm Gecina, which saw a big spread compression after reclassifying all of its outstanding debt to green bonds in June and outperformed the market and its peers.
The first signs are also starting to emerge of pricing variation linked to investors’ perception of issuers’ ESG credentials. Greener companies are attracting a bigger greenium in the secondary market, while some high-emitting companies, including airports and oil and gas companies, had showed no premium, according to the research.
The greenium expanded in the second quarter to –3.1bp for corporates, 0.5bp wider than the first quarter, and also increased as a percentage of spread to 8.5% in early July from 6.3% in early April as conventional bond spreads were compressed by an average 7bp in the wider market.
"We have continued to see an expansion of the greenium in the secondary market in the second quarter in most of the markets,” said Thibaut Cuilliere, head of real asset research at Natixis.
Big savings
Gecina saw a significant spread compression of 15bp–20bp versus the swap in the secondary market after it reclassified all 15 of its outstanding bonds totalling €5.6bn as green bonds in June, outstripping a 4bp tightening in the credit market and 6bp for the real estate sector.
The spread tightening covered the cost of reclassifying the bonds and is likely to encourage other companies to follow suit, but a critical mass of outstanding debt is required to reap the benefits.
“What Gecina did was a big success. Some other issuers will think about it, but reclassifying outstanding debt as green only makes sense if you have at least €7bn–€8bn of bonds outstanding," Cuilliere said.
After reclassifying its 15 outstanding bonds as green, 82% of Gecina’s financing is now ESG-labelled and all future bonds will be green or sustainability-linked.
In the second quarter, 72% of euro-denominated ESG corporate bonds traded tighter than their conventional counterparts, according to the research. The financial sector is also benefiting as a secondary market greenium finally appeared in covered bonds after initially moving from non-preferred senior initially to senior preferred.
SLB premium hard to spot
The sharpest increase in volume in the second quarter came from sustainability-linked bonds, with €34bn of issuance, Natixis said. It included deals from Italian utility Enel, French frozen food company Picard and Spanish oil major Repsol.
The sample is still too small to analyse, but initial signs suggest the SLB premium could be smaller than the greenium.
"It's a bit too early to say what the premium is on SLBs, but from what we're seeing so far, it looks smaller than green bonds. Looking at Enel, it seems that the greenium or premium attached to the SLB is lower than it is for the green bonds so far," Cuilliere said.
Comparing the greenium and SLB premium could also be difficult in future due to sector disparity as more high-emitting companies choose to raise SLBs linked to company strategy, rather than green bonds tied to specific projects.