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Corporate Green Bonds: Understanding the Greenium in a Two-Factor Structural Model

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  • Elettra Agliardi

    (University of Bologna)

  • Rossella Agliardi

    (University of Bologna)

Abstract

A novel structural model is developed to understand the determinants of green bond prices and the so-called ‘greenium’, that is, the premium that bondholders are willing to pay to invest in green securities rather than conventional ones. The presence of a greenium makes green bonds relatively cheap vehicles to fund environmentally sustainable projects and thus contributes to the shift to a green economy. Yet, evidence on the greenium is mixed and the determinants of green bond yields are not fully understood. In this model two sources of uncertainty are introduced, that is, of cash flows of the firm and of the effectiveness of the financed green projects. The adoption of two risk factors brings in some mathematical complexity but allows for a better modelling of the multi-facet nature of these financial instruments. Our model is rich enough to generate both a positive and a negative premium, as both have been detected in the empirical literature. Thus, we shed light on possible heterogeneity concerning the existence of a greenium in the green bond universe. Moreover, we show how green bonds affect the issuer’s creditworthiness, depending on the correlation of the green project with the core business of the firm and study their impact on investors’ portfolio allocation.

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  • Elettra Agliardi & Rossella Agliardi, 2021. "Corporate Green Bonds: Understanding the Greenium in a Two-Factor Structural Model," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(2), pages 257-278, October.
    • Handle: RePEc:kap:enreec:v:80:y:2021:i:2:d:10.1007_s10640-021-00585-7
    DOI: 10.1007/s10640-021-00585-7
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    3. Yoshihiro Zenno & Kentaka Aruga, 2023. "Investigating Factors Affecting Institutional Investors’ Green Bond Investments: Cases for Beijing and Shenzhen," Sustainability, MDPI, vol. 15(6), pages 1-16, March.
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    5. Danilo Liberati & Giuseppe Marinelli, 2024. "Was Covid-19 a wake-up call on climate risks? Evidence from the greenium," Questioni di Economia e Finanza (Occasional Papers) 832, Bank of Italy, Economic Research and International Relations Area.
    6. Yuming Zhai & Zhenghuan Cai & Han Lin & Ming Yuan & Ye Mao & Mingchuan Yu, 2022. "Does better environmental, social, and governance induce better corporate green innovation: The mediating role of financing constraints," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(5), pages 1513-1526, September.
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    8. Yang, Ji & Shi, Yajie & Zhang, Lifeng & Hu, Suhuan, 2023. "The influence of environmental information transparency of green bond on credit rating," Finance Research Letters, Elsevier, vol. 58(PB).
    9. Hu, Yuanfeng & Tian, Yixiang, 2024. "The role of green reputation, carbon trading and government intervention in determining the green bond pricing: An externality perspective," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 46-62.
    10. Ranjan, Ram, 2024. "Creating synergies between payments for ecosystem services, green bonds, and catastrophe insurance markets for enhanced environmental resilience," Land Use Policy, Elsevier, vol. 136(C).
    11. Silva, Florinda & Ferreira, André & Cortez, Maria Céu, 2024. "The performance of green bond portfolios under climate uncertainty: A comparative analysis with conventional and black bond portfolios," Research in International Business and Finance, Elsevier, vol. 70(PA).
    12. Fu, Yating & He, Lingyun & Liu, Rongyan & Liu, Xiaowei & Chen, Ling, 2024. "Does heterogeneous media sentiment matter the ‘green premium’? An empirical evidence from the Chinese bond market," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 1016-1027.
    13. Caleb Debrah & Albert Ping Chuen Chan & Amos Darko & Robert J. Ries & Eric Ohene & Mershack Opoku Tetteh, 2024. "Driving factors for the adoption of green finance in green building for sustainable development in developing countries: The case of Ghana," Sustainable Development, John Wiley & Sons, Ltd., vol. 32(6), pages 6286-6307, December.
    14. Carè, R. & Weber, O., 2023. "How much finance is in climate finance? A bibliometric review, critiques, and future research directions," Research in International Business and Finance, Elsevier, vol. 64(C).
    15. Hu, Xiaolu & Zhong, Angel & Cao, Youdan, 2022. "Greenium in the Chinese corporate bond market," Emerging Markets Review, Elsevier, vol. 53(C).
    16. Sergei Grishunin & Alesya Bukreeva & Svetlana Suloeva & Ekaterina Burova, 2023. "Analysis of Yields and Their Determinants in the European Corporate Green Bond Market," Risks, MDPI, vol. 11(1), pages 1-19, January.
    17. Yoshihiro Zenno & Kentaka Aruga, 2022. "Institutional Investors’ Willingness to Pay for Green Bonds: A Case for Shanghai," JRFM, MDPI, vol. 15(11), pages 1-16, November.
    18. Emre Arat & Britta Hachenberg & Florian Kiesel & Dirk Schiereck, 2023. "Greenium, credit rating, and the COVID-19 pandemic," Journal of Asset Management, Palgrave Macmillan, vol. 24(7), pages 547-557, December.
    19. Ivancevic Milo, 2024. "Analysis of Green Bond Yields in Different Economic Regimes: High and Low Interest Rates," Zagreb International Review of Economics and Business, Sciendo, vol. 27(2), pages 7-26.
    20. Vasundhara Saravade & Olaf Weber & Adam Vitalis, 2025. "To label or not? A choice experiment testing whether labelled green bonds matter to retail investors," Palgrave Communications, Palgrave Macmillan, vol. 12(1), pages 1-16, December.
    21. Kanamura, Takashi, 2025. "Stochastic behavior of green bond premiums," International Review of Financial Analysis, Elsevier, vol. 97(C).
    22. Pham, Linh & Cepni, Oguzhan, 2022. "Extreme directional spillovers between investor attention and green bond markets," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 186-210.
    23. Zenno, Yoshihiro & Aruga, Kentaka, 2023. "Investing the factors affecting green bond investments in China: Cases for Beijing and Shenzhen," MPRA Paper 116203, University Library of Munich, Germany.
    24. Sylwia Frydrych, 2021. "Credit Ratings of Issuers of Green Debt Instruments," European Research Studies Journal, European Research Studies Journal, vol. 0(4 - Part ), pages 172-179.

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