Issuers of ESG bonds benefitting from seven basis-point ‘Greenium’ as investor demand surges.
Investors are showing a clear preference for bonds falling under the ESG umbrella – green, social and sustainable – and are willing to pay more to hold them, according to BNP Paribas research.
The report, ‘2020: The year of the Greenium’, highlighted that companies issuing green, social and sustainable bonds have been paying “significantly lower” new issue premiums (NIPs) since 2018, and so there is a resultant “negative concession on these bonds”.
Year-to-date (YTD), the average NIP for ESG bonds sits at –2 basis points (bps), compared to 5bps for regular bonds. In 2019, the difference between regular and ESG bonds was only 2bps, thus showing a recent, rapid increase in ESG bond desirability as investors look to improve their ESG exposure.
“Investors have been willing to pay up to 7bps to be ESG conscious. This is the Greenium differential,” the report said.
The issuance of ESG bonds is growing exponentially but “still only represents less than 5% of total issuance in € and less than 1% in US$,” the report added. ESG-labelled bonds represent just 6.4% and 1.4% of the € and US$ investment grade credit markets.
This insight follows previous research published by the Climate Bonds Initiative (CBI), which pointed to the strong supply in the sustainable debt market in the first half of 2020, with more than US$250 billion issued so far compared in US$341 billion for the full year of 2019.
Resilience in a bear market
ESG bonds do have a higher price point, but BNP Paribas research showed there are financial advantages for investors looking to hold green bonds.
“[ESG bonds] have lower bid / offer spreads and show an overall larger balance of buyers versus sellers,” said BNP Paribas’ global head of credit trading analysis Ines de Tremiolles. Although issuance remains comparatively low to other areas of the market, there is a proportionate demand which balances this out.
“ESG and Socially Responsible Investing (SRI) funds have outperformed their traditional benchmarks over the last three years,” the report added.
The report pointed to the MSCI World Socially Responsible Index, which logged 12% returns with a Sharpe ratio score of 0.42 (down from 2.97 in 2019). Although lower than desirable, this was still better than the MSCI World Index, which promised 8% returns and a Sharpe ratio score of 0.28.
Where is demand coming from?
The EU continues to lead the way, in terms of supply, with over three-quarters (75%) of global sovereign green bond issuance coming from Europe. However, with recent net zero emissions pledges from competitive economies like China, the report noted this could be a “possible game changer” for the EU-dominated market.
German and Austrian investors proved to be “the most unconvinced about ESG bonds”, with an average ratio of buyers versus sellers of 54% for all credit bonds versus 47% for ESG-labelled bonds. ESG-labelled bonds have seen the most demand in the more retail-driven Italian market, with a comparative balance of 71% versus 61%.
Investors are further welcoming debut issuers of ESG-labelled bonds from industries previously more removed from the ESG space, the report added.
“Automotive bonds have been the main beneficiaries this year and should continue to be in the foreseeable future,” the report noted. “Within financials we think banks will continue to issue preferred and non-preferred seniors in ESG format, which have priced on average 9bps, inside regular new issue bonds.”
Is Greenium set to continue?
Investors appear to have an “increased social and environmental conscience”, the report concluded, which is encouraging asset managers to add social value to their portfolios by launching more sustainable funds.
Initiatives such as the EU Taxonomy Regulation – which will require asset managers to measure and disclose the specific percentage of investments that are “environmentally aligned with EU carbon neutral objectives” – and climate-related disclosure requirements proposed by the Task Force on Climate-related Financial Disclosures (TCFD) are expected to further bolster growth in sustainable markets as investors fall into line.