The Green Bond Premium: a Fixed-Effects Regression Approach

Although it's evident that investors have been reallocating their capital towards more sustainable assets during the last years, it's still unclear whether they are willing to accept a lower return to hold these assets. This work aims to investigate the average difference in the yield spread at issuance between green and conventional bonds by building a standard OLS model to which various fixed effects are subsequently added. I analyze a global panel of more than 4500 green and 37500 conventional bonds, to ascertain the borrowing cost advantage at issuance of more environmentally friendly credit products. Results highlight that, on average, green bonds have a lower yield of about 4 basis points relative to conventional bonds. This negative compensation difference is evidence of the existence of a so-called "greenium" in the bond market. These findings remain statistically relevant by splitting the sample for the main levels of issuer type.