Are European Green Bond Yields Lower Than the Yields of Their Conventional Counterparts?

Abstract

In this paper, we contribute to the growing literature on sustainable finance by investigating whether European green bonds provide a lower issue yield compared to their conventional counterparts, i.e. if there exists a greenium in the primary market. We use the Nelson-Siegel model to investigate the term structures of green bonds compared to conventional bonds and a principal component analysis to determine if there is a yield difference between the two types of bonds. Our sample is constructed using a matching approach and contains bonds issued between 2013 and 2023. The results of the study are significant with an estimated greenium of 8 basis points and the term structure of green bonds indicates lower yields for green bonds at longer maturities. This means that issuers benefit from long term green bonds as the advantage of green bonds increases with the uncertainty associated with the passage of time. The existence of a greenium in the primary market implies that cheaper funding for green investments can be secured (Partridge & Medda, 2019).