Calculating the 'greenium'? Germany may have an answer

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AMSTERDAM (Reuters) – Germany’s debut green bond may finally provide an answer to the question that’s been at the heart of the sustainable investing spree — how much of a premium must investors pay to get hold of green securities?

The euro zone’s largest economy raised 6.5 billion euros on Wednesday from the sale of its first ‘green’ bonds, a 10-year note, with proceeds earmarked for environmentally beneficial projects.

But what investors were waiting for was the price.

The deal launched with a -0.463% yield, which lead managers said meant a one basis point premium compared to a conventional equivalent. That difference represents what investors often call a “greenium” — the price tag for a green issue.

Germany’s green debt plan differs from peers such as France and the Netherlands in that each green bond sold will be matched with a conventional twin. Wednesday’s deal for instance is twinned with a conventional issue sold in June .

And whenever an existing green bond is tapped, its twin will be upsized by the same amount.

The structure will show investors the exact cost of going green. Until now, gauging the green premium meant examining an issuer’s regular yield curve to gauge where a hypothetical conventional bond identical to the green bond in question might trade.

“For the first time, we will be able to exactly see what the (green) premium looks like without having to do any maths, except for a simple ‘minus’ calculation, one yield minus the other,” said Christoph Rieger, head of rates and credit research at Commerzbank (DE:CBKG) in Frankfurt.

Green bonds usually trade with a lower yield than comparable conventional bonds, as dedicated funds chase a limited amount of bonds available, so investors have to pay a premium to buy them. It’s an important consideration, given pressure on funds to invest sustainably and expectations of huge future growth in the still-tiny green debt market.

For a graphic on Green bonds tend to carry price premium:

https://fingfx.thomsonreuters.com/gfx/mkt/azgvonzelpd/Gyp1G-green-bonds-tend-to-carry-a-price-premium-nbsp-.png

And all else equal, they offer issuers more attractive borrowing costs.

The premium implies Germany will save around 6 million euros over the lifetime of the bond, Mizuho analyst Peter McCallum calculates.

Johann Ple, portfolio manager at AXA Investment Managers, which runs 815 billion euros, says factors such as supply-demand balance, liquidity, maturity and coupon differences generally conflate comparisons between green and conventional bonds.

“In this case two similar bonds will help to clarify the “greenium”… as it will narrow the sources of differences and potentially justify that green bonds offer additional transparency and environmental benefits at no additional cost,” he said

Some of the price premium on green bonds is due to their scarcity; German green issuance for instance could reach 11 billion euros this year, while total debt sales should amount to around 270 billion euros.

But accurately gauging relative issuance costs should convince more borrowers of the financial benefits of going green, said Piet Christiansen, chief strategist at Danske Bank in Copenhagen.

Just over $750 billion euros worth of green bonds have been issued since 2007, according to the Climate Bonds Initiative, dwarfed by the $100 trillion outstanding on global bond markets.

But issuance is likely to increase steeply soon, as a third of the debt backing the European Union’s 750 billion euro recovery fund could be backed by green bonds, potentially almost doubling the global green bond market.

For a graphic on Green bonds make up just 3.7% of global bond issuance:

https://fingfx.thomsonreuters.com/gfx/mkt/qzjvqwqegvx/greenbondsEU2107PNG.PNG

So Germany’s structuring of this issue could well be key in drawing more borrowers to the green market.

“When Germany will (create) a green curve, then this is what we will price the green projects off of. So it is really that there will be a benchmark of where green pricing will be, going forward,” Danske’s Christiansen said.