10 May, 2022 / Comment

Shades of green: Do they matter?

By Gianfranco Gianfrate, Professor of Finance, EDHEC Business School

Professor Gianfranco Gianfrate of the EDHEC Business School looks at how proceeds are used from light to dark green bonds

Shades of green: Do they matter?

Green bonds are a relatively new type of bonds defined by the International Capital Markets Association (ICMA) as “any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new or/and existing eligible green projects”.

The “greenness” of bonds usually is certified by an external review. According to the ICMA’s Green Bond Principles, there are four main types of green external reviews: second-party opinion, verification, certification, and green rating. External reviewers are typically independent research institutions dedicated to environmental research such as the Center for International Climate Research (CICERO). The objective of an external reviewer is to determine whether a given activity or technology supports a low-carbon and climate resilient society in the long-term.

The second opinions are typically graded Light Green, Medium Green or Dark Green. Light Green is allocated to projects that are climate-friendly but lack a long-term horizon; while the bond proceeds can deliver short-term GHG emission reductions, the project will still extensively rely mostly on fossil fuels. Medium Green is allocated to projects that incorporate a long-term vision to reduce emissions, but they are not ambitious in the scope of carbon footprint reduction. Dark Green is allocated to projects show ambitious but realistic carbon footprint reduction targets. Additionally, the issuers have a robust strategy to reduce or mitigate the exposure to other transitional and physical climate risks. Therefore, the Dark Green bonds are considered the best green assets available in the fixed income realm.

A recent study explored whether the green bonds rated “dark green” by CICERO are actually priced differently in the market from the light/medium-green ones as well as from the conventional bonds. To measure whether dark-green bonds are priced differently, we match our bonds, rated by CICERO, with comparable bonds that differ as little as possible apart from the green feature. The analysis identified bonds from the same issuer, with the same currency, rating, maturity, type, payment rank and coupon type. We find that on average dark-green bonds are not priced differently from otherwise similar non-green bonds.

However, we find the premium for dark-green bonds increases over time, but it has been particularly penalised in 2020, possibly because of lesser investor focus on assets’ environmental footprint during the Covid-19 crisis.

Importantly, the shades of green do appear to matter for responsible investors. Institutional investors who have signed the United Nations’ Principles for Responsible Investment (PRI) have a significantly higher ownership of dark-green bonds than of similar conventional bonds (about 16% more), while the light/medium green bonds do not feature significantly higher holdings of UNPRI investors (see the Table below).

Bond Ownership by UNPRI Investors
 Dark green vs. ConventionalLight green vs. ConventionalDark green vs.      Light green
Mean Difference16.24%1.37%14.87%
Statistical significanceHighNoneModerate

This result implies that PRI investors prefer to hold green bonds but they also perform a thorough due diligence and end up holding a significantly higher percentage specifically of dark-green bonds. On the other hand, PRI investors seem to treat Light & Medium green bonds as equal to the conventional bonds. This finding supports the view that the shades of green do matter for climate-aware institutional investors even if the demand for dark-green assets does not translate in a tangible premium as far as the bond pricing is concerned.


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