Greenium fluctuations and climate awareness in the corporate bond market

This study offers a novel explanation for the dynamics of the ‘greenium,’ that is the negative yield differential of corporate green bonds relative to equivalent conventional bonds. Utilising a matched dataset of green and conventional corporate bonds from January 2014 to July 2022, we find that the ‘greenium’ in the secondary market responds significantly, even if briefly, to climate policy events. It reaches its peak of 16 basis points shortly after the 2015 Paris Agreement. This response is economically significant as it accounts for 20% of the average yield spread observed in all the bonds within our matched sample. In addition, we find that when natural disasters strike, certified green bonds exhibit a positive return, in stark contrast to the negative performance of conventional bonds. We also show that heightened media coverage of climate change leads to a narrowing of yield spreads for both green and conventional bonds issued by green bond issuers. The impact is even more pronounced for certified green bonds. Taken together, these insights support the view that market sentiment is a key driver of the time variation of the greenium.