Testing the Green Bond Premium in COVID-19 Pandemia

Introduction

The environmental concerns, especially the climate change mitigation efforts created a new type of marketable debt which is named as Green Bonds. The green bonds are considered to be amongst “theme” bonds. In the past such theme bonds were issued as railway bonds in 1900s, the war bonds of the early 20th century or the highway bond of the 1960s. The proceedings of the green bonds have been typically used for financing the projects of renewable energy, energy efficiency, clean water, sustainable natural resources and land use, climate change adaptation, and pollution prevention and control.

Under the framework of sustainable finance, the most widely used financing method has been green bonds. International Capital Markets Association (ICMA) defines green bonds as “any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new or/and existing eligible green projects”.

European Investment Bank and World Bank issued the first Green / Climate Awareness Bonds in 2007. The Climate Bond Initiative (CBI) launched the Climate Bond Standard and Certification Scheme in December 2010. The market making issues were realized by IFC which sold the first benchmark USD 1 billion Green Bond in March 2013, by Massachusetts which sold the first municipal green bond in June 2013, by Gothenburg which sold the first City Green Bond in October 2013 and Tesla Energy which sold the first solar ABS in November 2013. The first corporate Green Bond by Vasakronan, a Swedish property company in November 2014. In 2014, ICMA established its Green Bond Principles. ICMA updated and revised its Green Bond Principles in 2018.

The governments and municipalities are in the market to finance specific local projects or meet selected environmental targets. Financial institutions also can issue green bonds to diversify their portfolios by enabling them to apply environmental standards to their borrowers. Also, private companies, particularly energy and utility companies have issued green bonds to finance specific environmental projects. Under current conditions, nearly 90% of the green bond issuers are mainly of investment grade quality that have above BBB ratings. Not only conglomerates such as Apple, Intesa and Iberdrola, but also sovereigns such as Republic of France, Republic of Poland and Kingdom of Belgium have at least one green bond. Furthermore, especially issuer corporates from China and India have interest in order to finance especially renewable energy projects.

The purpose of this study is twofold; firstly, to elaborate the characteristics of the green bonds as an actively utilized sustainable finance tool as well as that of the green bond market as of 2021. The peculiarities of the green bonds in terms of the utilization of the proceedings make it as a special investment alternative for many institutional investors. In this regard, the investors are supposed to accept lower yields as compared to plain vanilla bonds in primary and secondary bond markets. The second and more relevant purpose of this paper is determining the existence and magnitude of the green bond premium in the secondary market in the times of Covid-19 in the period between March 2020-April 2021 as compared to before Covid-19 times. However, making a rational comparison requires the acceptable amount of the market data of the selected bond pairs before Covid-19, which is generally unavailable. In fact, this is the constraint of the study and in order to overcome this, the prior research findings are used as they are assumed to use the required amount of market data for analysis. In the analysis a matching procedure is used by pairing a green bond and a conventional of the same issuer. By that way, the variables such as rating, sector, amount of the issue, maturity and external review are balanced The pairing process is realized by using three main variables which are issue amount, issue date and maturity date under some principles and all other criteria represent full match.

The contribution of this study to the relevant literature is twofold; there exists higher negative greenium for USD denominated issues as compared to Euro denominated issues. Secondly, as the purpose of the study is determined as the elaboration of greenium in Covid-19 times, the finding of a negative premium of 39 basis points may indicate an increase in green premium as compared to the results of research realized using the market data of normal times.