Greenium is a term coined by combining the words “green” and “premium” and it stands for the premium obtained from environmentally friendly securities. Although highly idealized as a concept, new research investigates whether investors are willing to trade off wealth for societal benefits.
Environmental, Social, and Governance (ESG) measurement, Corporate Social Responsibility (CSR) activities, and Socially Responsible Investing (SRI) are increasingly important research topics in both academic and professional areas. Since 2013, states and other governmental entities have issued over $23 billion of green bonds to fund eco-friendly projects. They are identical to ordinary municipal bonds in all ways except the use of proceeds is allocated to fund ‘‘environmentally friendly projects’’ (e.g., sustainable water management and energy production).
Although their purpose and effect are very positive the real question is how many investors are willing to forgo wealth to invest in environmentally sustainable projects? For instance, if we were to present investors with a high-ESG and low ESG security whose risk and returns are identical, would investors pay more for the high-ESG security? While standard no-arbitrage arguments suggest these securities should price identically, there is growing literature that argues otherwise.
To answer this, the paper compares green securities to nearly identical securities issued for non-green purposes by the same issuers on the same day and finds economically identical pricing for green and non-green issues. The issuers in focus are United States municipalities because they have been one of the largest issuers of green bonds.
Three unique institutional features of the market enable this methodological approach to be less prone to the standard correlated omitted variable critique of prior ESG research. The first is that municipal issuers commonly price multiple tranches of securities, both green and non-green securities, on the same day with similar maturities. This occurs for several reasons, such as issuer requirements to track their use of funds to comply with IRS requirements (IRS, 2017), and limits to bond issuance by state constitutional mandates. The second feature of municipal bonds is that the credit for these green bonds is identical to the credit for their non-green counterparts (Fischer et al., 2019). Finally, the average issuance size (supply) is small ($5.36 million on average) compared to corporate green bond issuances, which are often hundreds of millions (or even billions) of dollars.
Overall, the results strongly suggest that United States municipal investors are entirely unwilling to sacrifice returns to invest in green securities. While there has been substantial growth in green bond markets, they make up only a small fraction of debt markets. The primary reason cited for the low market penetration to date is higher issuance costs (Chiang, 2017). The cost of capital benefits of these securities appears largely hypothetical, although it may arise as the market matures. The only apparent benefit found is that they seem to diversify the issuer’s investor base, which is also consistent with the views of practitioners (e.g., Braun, 2019). This finding is not universal because the municipal securities market is institutionally quite different than other asset classes. Although the paper does not find greenium in this market, a greenium may exist in other markets such as the corporate green bond market.
References
- Larcker D. F., Watts E. M. 2020. Where’s the greenium? Journal of Accounting and Economics, Vol. 69, 2–3, 101312, ISSN 0165-4101, https://doi.org/10.1016/j.jacceco.2020.101312.
- IRS, 2017. Complying with Arbitrage Requirements: A Guide for Issuers of Tax-Exempt Bonds.
- Fischer, P., Li, Y., Rogow, I., Sobel, L., McGown, M., 2019. Municipals Weekly: Bumping Our Way to Spring. Bank of America Merrill Lynch.
- Chiang, J., 2017. Growing the U.S. Green Bond Market, vol. 1. California State Treasurer’s Office
- Braun, M.Z., 2019. Muni-bond buyers want tax breaks. Saving the Earth? Not much. Bloomberg. https://www.bloomberg.com/news/articles/2019-04-11/muni-bond-buyers-want-tax-breaks-saving-the-earth-not-so-much.
