Investors Pay Premium for Green Bonds, Study Reveals
Investors demonstrate willingness to accept lower yields on green bonds, supporting sustainable projects without major return sacrifices. New research highlights this trend in Germany’s sovereign bond market, where buyers pay a modest premium—known as the “greenium”—for environmentally labeled securities.
Aaron Pancost, assistant professor of finance at Texas McCombs, along with Stefania D’Amico from the Federal Reserve Bank of New York and Johannes Klausmann from the University of Houston, analyzed German government bonds from 2009 to 2023. Germany serves as an ideal case study due to its issuance of near-identical twin bonds: standard bonds matched with green bonds sharing the same issuer, maturity, and coupon rates.
Transparent Data and Auditing Processes
“There’s a whole process for auditing them beforehand and afterward to show what they did invest in and how those investments turned out,” Pancost explains. This transparency ensures clear tracking of funds directed toward sustainable initiatives.
Measuring the Greenium
Determining the greenium requires more than simple yield comparisons, as spreads fluctuate due to factors like safe-haven demand or collateral use. Researchers developed advanced pricing models for regular and green bonds separately. The resulting difference provides a precise greenium measure:
- Averages four basis points, equivalent to 4% of a 10-year bond’s yield.
- Rises after major climate events, such as severe German flooding, and during energy crises.
- Peaked at seven basis points following Russia’s invasion of Ukraine.
- By 2023, short-term bonds showed a larger greenium than long-term ones, indicating expectations of decline over time.
Pancost notes the modest gap: “Those two securities have prices that are very close to each other, but one is slightly higher. It’s quite modest in the grand scheme of things.”
Government Opportunities and Global Implications
Lower yields on green bonds enable governments to fund green transitions cost-effectively. “It’s free money, so long as the government is making those green investments anyway,” Pancost states. Issuing more short-term green bonds could save taxpayer funds.
While Germany, France, the UK, and others actively issue green bonds, the U.S. has yet to follow suit. Pancost views this as a missed chance: “Investors are giving up profit in order to invest in something green. If people want to invest in green, we should let them.”
The findings appear in the Journal of Financial Economics under the title “The benchmark greenium” by Stefania D’Amico et al. (DOI: 10.1016/j.jfineco.2025.104217).
