Greeniums and “Halo” effect – green bonds make financial sense

May 09 2019

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

View bio

Greeniums and “Halo” effect – green bonds make financial sense

PDF (1 MB)


Other insights

View more insights

I took part in a panel at this year’s Climate Bonds conference, discussing the latest evidence around green bond pricing in the primary and secondary markets. Joined by other practitioners and researchers - including representatives from the World Bank and the European Commission - the very engaging discussion brought up several takeaways, which I want to share here.

Greeniums – opportunities and limits

Green bonds pricing tighter than similar vanilla bonds have made the headlines over the past years. Unmet demand for green debt is helping green issuers to achieve such greeniums, with the average final pricing of USD and EUR green bonds around two basis points tighter - relative to initial pricing thoughts - than that of "vanilla" bonds[1]. However, a green bond pricing benefit is mostly found in only smaller and niche markets such as the green US Municipal market.

During our panel we also discussed whether FIs could achieve larger greeniums if they guaranteed to pass on the pricing benefit to customers, for example by offering cheaper green mortgages. Consensus was, however, that such a strategy would not translate into meaningful price improvements at this current stage, but could still help winning new customers.

Finally, there was also a word of caution: Investors as well as issuers face additional costs when assessing green risks or preparing to raise green funds respectively, so an excessive focus on solely a pricing benefit – which comes with higher costs - is not helpful. Equally, we questioned whether investors could argue to be compensated for the comparatively reduced liquidity of green bonds and therefore in fact demand a pricing benefit for themselves.

ESG credentials have “Halo” effect for corporate debt

Several studies in the past years have identified a link between a corporate ESG focus and lower costs of corporate financing. A Hermes study[2] found, that companies with the weakest ESG credentials tend to trade with the widest CDS spreads, indicating that a corporate focus on ESG reduces a firm’s risk and therefore its cost of debt capital. And the “Halo” effect of green bonds – improving the trading of regular bonds of the same issuer – is now also moving into equities. Research is showing that an ESG focus and green issuances as a result, lead to share price outperformance as well as (longer term) RoA and ESG metric outperformance[3].

More incentives can help boost the market

To further develop the green bonds market, market actors are already working together to introduce common standards and incentives. Our panel welcomed initiatives such as the further development of the “green alpha” concept and the project launched by the Principles for Responsible Investment (PRI), the United Nations Environment Programme Finance Initiative (UNEP FI) and The Generation Foundation to clarify and broaden investors’ obligations and duties in relation to the integration of environmental, social and governance issues in investment practice and decision-making.

Looking at incentives, green bonds tax exemptions are a powerful tool to help speed up the adoption of green thinking amongst corporates. Municipal authorities in the US for example can access the Clean and Renewable Energy Bond (CREB) tax-credit program for funds used to finance projects that reduce greenhouse gas emission[4]. Issuers using this program can theoretically pay 0% interest rate with investors receiving federal tax credit instead of interest payment. Such initiatives also translate into green pricing benefits.

Green bonds increase staff satisfaction and customer retention

Green bonds can help to make sustainability part of a company’s DNA, changing corporate thinking and improving stakeholder relationships far beyond the investment community.

Brand perception, customer loyalty, staff satisfaction and successful recruitment are all linked to the ESG credibility of a company: In the search for talent and customers amongst the Millenial generation with a much higher sensibility for climate change and a desire to make a difference, corporates with a green agenda will score higher. Equally, a green focus positively affects staff satisfaction with many studies showing that there is a strong correlation between staff wellbeing and positive corporate performance[5].

Green bonds
Industry participation
Fixed income


[1] CBI Pricing Report H1 2018, October 2018
[2] “Pricing ESG Risk in Credit Markets”, Hermes Credit and Hermes EOS Research Paper, Q2 2017
[3] “The Investor Revolution”, Harvard Business Review, November 2018
[4] “Green is the new black”, RBC Capital Markets, April 2017
[5] “The case for linking employee wellbeing and productivity”, Personnel Today, January 2018


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.