BTL 795 - Greenium

 

The Banking Tutor’s Lessons

BTL 795                                                                 18-06-2025

Greenium

Greenium, also known as the green-premium, refers to the pricing advantage or cost savings an issuer receives when issuing a green bond compared to a conventional bond. 

Greenium, or green-premium, refers to the savings an issuer of a green bond realises on the associated coupon payment because the bond is green. 

It is the difference in yield (or borrowing cost) between green bonds and their conventional counterparts. 

Green bonds finance environmentally friendly projects, and investors are willing to accept lower yields or even pay a premium (greenium) for them, reflecting their commitment to sustainability. 

Green bonds are Debt instruments used to finance projects that are considered environmentally beneficial, such as renewable energy, energy efficiency, and sustainable transportation. 

Investors are increasingly prioritizing sustainable investments, leading to the demand for green bonds and potentially lower yields (or higher prices) for issuers. 

Issuers of green bonds can benefit from lower borrowing costs due to the greenium, making it more attractive to issue green bonds and finance green projects. 

Factors like the strength of the sustainability story, the perceived risk associated with the green project, and the overall market demand for green investments can influence the size of the greenium. 

In essence, greenium reflects the market's willingness to reward sustainable investments with lower borrowing costs, creating incentives for both investors and issuers to embrace green finance. 

Further, long-term green projects are associated with a reduction in both physical and financial risk. Thus, investors settle for lower returns, making green projects financially attractive for the issuers of these debt instruments. 

Sekhar Pariti

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