Investors willing to pay a little more for green bonds
Premium for green debt could help fund sustainable projects
Green investors often boast that they can support sustainability without sacrificing returns. But new research from Texas McCombs suggests otherwise. It also offers governments opportunities to raise more money from those investors for sustainable projects.
In Germany’s sovereign bond market, buyers are quietly paying a premium for green bonds — by accepting lower yields on them. So finds Aaron Pancost, assistant professor of finance, who calls the difference a “greenium.”
Pancost’s central question was the size of the greenium. “How much are investors willing to pay for investments that are green?” he says.
With Stefania D’Amico of the Federal Reserve Bank of New York and Johannes Klausmann from the University of Houston, Pancost looked at German government bonds from 2009 to 2023.
Germany makes a good test case, he explains, because each green bond has a near‑identical twin: an ordinary bond with the same issuer, maturity, and coupon. Any price difference between the bonds can be related to how much extra people are willing to spend — just because of a “green” label.
Data on the bonds are also very transparent, he says. “There’s a whole process for auditing them beforehand and afterward to show what they did invest in and how those investments turned out.”
Measuring Green Interest
But measuring the greenium was not as simple as comparing the interest rate on a green bond with a twinned regular bond, the researchers found.
The spread doesn’t only reflect environmental preferences. It can widen and narrow for other reasons. For example, investors sometimes rush into regular German bonds as safe havens or to use as collateral for loans.
So, the researchers also developed a second measure. They estimated pricing patterns for all German government bonds: one for regular bonds and one for green bonds. The difference between those two patterns gave a cleaner measure of the greenium:
Over time, it averaged 4 basis points or 4% of the yield on a 10-year bond. It wasn’t static but increased after major climate events — such as severe flooding in Germany — and during periods of energy stress. After Russia’s invasion of Ukraine, it peaked at 7 basis points. By 2023, the greenium was larger for short-term bonds than for long-term bonds, suggesting investors expected it to decline over time. Pancost was surprised at the narrowness of the gap between regular and green bonds. “Those two securities have prices that are very close to each other, but one is slightly higher,” he says. “It’s quite modest in the grand scheme of things.”
In practical terms, by accepting slightly lower yields on green bonds, investors are helping to finance the green transition, he adds.
That knowledge could allow governments to issue more short-term green bonds with lower interest rates, saving money for taxpayers. “It’s free money, so long as the government is making those green investments anyway,” he says.
Although Germany, France, the UK, and many other countries issue green bonds, the U.S. does not. Pancost sees this as a missed opportunity.
“Investors are giving up profit in order to invest in something green,” he says. “If people want to invest in green, we should let them.”
“The Benchmark Greenium” is published in Journal of Financial Economics.
END
In Germany’s sovereign bond market, buyers are quietly paying a premium for green bonds — by accepting lower yields on them. So finds Aaron Pancost, assistant professor of finance, who calls the difference a “greenium.”
Pancost’s central question was the size of the greenium. “How much are investors willing to pay for investments that are green?” he says.
With Stefania D’Amico of the Federal Reserve Bank of New York and Johannes Klausmann from the University of Houston, Pancost looked at German government bonds from 2009 to 2023.
Germany makes a good test case, he explains, because each green bond has a near‑identical twin: an ordinary bond with the same issuer, maturity, and coupon. Any price difference between the bonds can be related to how much extra people are willing to spend — just because of a “green” label.
Data on the bonds are also very transparent, he says. “There’s a whole process for auditing them beforehand and afterward to show what they did invest in and how those investments turned out.”
Measuring Green Interest
But measuring the greenium was not as simple as comparing the interest rate on a green bond with a twinned regular bond, the researchers found.
The spread doesn’t only reflect environmental preferences. It can widen and narrow for other reasons. For example, investors sometimes rush into regular German bonds as safe havens or to use as collateral for loans.
So, the researchers also developed a second measure. They estimated pricing patterns for all German government bonds: one for regular bonds and one for green bonds. The difference between those two patterns gave a cleaner measure of the greenium:
Over time, it averaged 4 basis points or 4% of the yield on a 10-year bond. It wasn’t static but increased after major climate events — such as severe flooding in Germany — and during periods of energy stress. After Russia’s invasion of Ukraine, it peaked at 7 basis points. By 2023, the greenium was larger for short-term bonds than for long-term bonds, suggesting investors expected it to decline over time. Pancost was surprised at the narrowness of the gap between regular and green bonds. “Those two securities have prices that are very close to each other, but one is slightly higher,” he says. “It’s quite modest in the grand scheme of things.”
In practical terms, by accepting slightly lower yields on green bonds, investors are helping to finance the green transition, he adds.
That knowledge could allow governments to issue more short-term green bonds with lower interest rates, saving money for taxpayers. “It’s free money, so long as the government is making those green investments anyway,” he says.
Although Germany, France, the UK, and many other countries issue green bonds, the U.S. does not. Pancost sees this as a missed opportunity.
“Investors are giving up profit in order to invest in something green,” he says. “If people want to invest in green, we should let them.”
“The Benchmark Greenium” is published in Journal of Financial Economics.
END