Greeniums in ESG-Labeled Bonds: The Impact of Vintage Year and Quality
Investors in bonds labeled as ESG expect that issues with strong green or social credentials will have higher prices than conventional bonds from the same issuer. This price premium, called the “greenium,” has been decreasing over time. However, when considering factors such as quality and volume of issuance per vintage year, the situation becomes more complex.
It is widely known that the average greenium across major bond indices has decreased in recent years, but the impact of vintage year on greeniums is not as well understood. Vintage year is important because both the issuance levels of ESG-labeled bonds and the quality of their ESG proposition have changed significantly over time.
The decrease in average greeniums is mainly due to two related factors: an increase in the issuance of ESG-linked bonds and a decline in the quality of the ESG proposition in many newer issues. These changes can be seen more clearly when analyzing vintage years.
Many older ESG-labeled bonds issued in 2018-2019 have maintained their greeniums over time, including issues from pioneering financial institutions and top European names. In contrast, issuers who recently joined the ESG trend generally issued less well-structured bonds with negligible greeniums.
As with all ESG-labeled bonds, it is important to evaluate each issue individually because their characteristics vary greatly within each sub-category and from bond to bond. Thorough fundamental analysis is the only way to determine if an ESG-labeled bond deserves its greenium.
It is widely known that the average greenium across major bond indices has decreased in recent years, but the impact of vintage year on greeniums is not as well understood. Vintage year is important because both the issuance levels of ESG-labeled bonds and the quality of their ESG proposition have changed significantly over time.
The decrease in average greeniums is mainly due to two related factors: an increase in the issuance of ESG-linked bonds and a decline in the quality of the ESG proposition in many newer issues. These changes can be seen more clearly when analyzing vintage years.
Many older ESG-labeled bonds issued in 2018-2019 have maintained their greeniums over time, including issues from pioneering financial institutions and top European names. In contrast, issuers who recently joined the ESG trend generally issued less well-structured bonds with negligible greeniums.
As with all ESG-labeled bonds, it is important to evaluate each issue individually because their characteristics vary greatly within each sub-category and from bond to bond. Thorough fundamental analysis is the only way to determine if an ESG-labeled bond deserves its greenium.
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