Analyzing the economic advantage of issuing green bonds

When corporations seek to raise capital, they may choose to issue green bonds. Green bonds are like typical corporate bonds but include a commitment to using the capital raised towards projects with intended environmental benefits.

There are various reasons why corporations may pursue green bonds. A primary motivation is that by highlighting an investment of hundreds of millions of dollars toward efforts like developing electric vehicles or advancing recycling technology, they send a strong message to their customers, investors, regulators, and employees about their position on environmental issues and the fundamental direction of their business.

However, beyond the signaling benefits, are there any financial benefits to issue a bond formally labeled as “green”? Does the growing amount of assets under management from investors dedicated to green or environmental activity translate to lower borrowing costs for corporations issuing green bonds?

A study developed in July 2023 by Wells Fargo’s Corporate & Investment Banking (CIB) team examines data from January 2021 to June 2023 and explores these questions and the existence of a “greenium” — a fusion of green and premium — to see if the market assigns a price premium, indicating a lower borrowing cost, to green bonds when compared to conventional securities issued by the same firm.

In the study, CIB’s Sustainable Finance Debt Capital Markets team found that green bonds have traded in a 2 – 5 basis points (bps) range inside conventional comparable securities on a median basis since 2021, denoting a potential funding advantage in both U.S. and European markets.

Read the full July 2023 report: Exploring Evidence of a “Greenium” in IG USD & EUR Corporate Secondary Markets.