Sacrificing yield for sustainability?

In 2020, the Jönköping International Business School in Sweden published a paper which found that the yield of green bonds is, on average, 15 to 20 basis points lower than that of conventional bonds. Do green bonds sacrifice yield for sustainability?


The European Investment Bank issued the first green bond, the 'Climate Awareness Bond', in 2007. The green bonds market has gained considerable ground since 2013, having been growing steadily for years. In 2021, USD570 billion worth of ESG bonds are expected to be issued, with green bonds accounting for around USD260 billion (Source: ESG market outlook 2021. Issuer diversification to boost market. Unicredit. Munich, 2 December 2020).

Green bond growth 2011-2021

Green bond growth 2011-2021
Source: Climate Bonds Initiative, Bloomberg, UniCredit Research

Over the past few years, we have seen banks and investors continually oversubscribing for green bonds. The Italian State has the largest order book to date, having issued its first Green Bond in March 2021. The loan, which is due on 30 April 2045, is for €8.5 billion. The complete order book exceeded €80 billion. The increasing inflow from cash towards sustainable bonds has not been limited to government loans, however, but extends to covered bonds, sub-sovereigns and agencies, and corporate bonds.

The chart below on the left shows that this inflow was continuously higher than for non-sustainable bonds in 2019, 2020 and the first months of 2021. The chart below on the right shows that sustainable and non-sustainable bonds performed similarly during that period.

Sustainable bonds have had consistently monthly inflows, but comparable performance

Sustainable bonds have had consistently monthly inflows, but comparable performance
Source: HSBC calculations, Refinitiv Lipper tot 28 februari 2021.

This conclusion is, however, at odds with the findings of the study carried out by Jönköping International Business School (Drivers of green bond issuance and new evidence on the ‘greenium’). To find out whether ‘greenium’ actually exists, the researchers compared approximately 2,000 green bonds with 180,000 non-green bonds that had been issued between 2007 and 2019. They concluded that the yield of green bonds is, on average, 15 to 20 basis points lower than that of conventional bonds. "Greenium" is a premium that issuers receive for issuing green bonds rather than conventional (non-green) bonds. This automatically means that investors obtain lower returns on investments in green bonds than in conventional bonds.

According to the researchers, the most plausible explanation for the existence of greenium is that investors are willing to pay more for green bonds given the focus on the ‘E’ (for environmental and climate-related themes) in ESG. They also found that it is due to the fact that investors with special ‘green bond portfolios’ are less price-sensitive.


Reality and actual practice with regard to green bond management are more intractable, however. We therefore disagree with the conclusions of the Swedish study, given that the models and methods the researchers applied ignored several important aspects.

In that study, most of the green bond issuers had no credit rating. Many green bonds that belong to the group of senior unsecured debt are also included. Active management is often subject to investment restrictions, e.g. with respect to credit ratings. For example, the credit ratings of actively managed ACTIAM investment funds have to be at least ‘investment grade’. Green bonds carry particular weight in the ‘sub-sovereigns and agencies’ market segment, which is marked by low risks and relatively high levels of liquidity. The study also took no account of the investment restriction as regards the minimum value. For instance, ACTIAM usually does not invest in bonds worth less than €500 million. These two investment restrictions alone (credit rating and minimum value) mean that the results obtained with our green bond investments differ sharply from the study.

Green bond premium (bp)

Green bond premium (bp)
Source: Danske Bank

Other factors are time and location. The graph above shows us that greeniums can fluctuate substantially in time and differ strongly from one country to another. Investors who are not forced to buy green bonds are able to vary their acquisitions across asset categories, regions, issuers and time. This means that the portfolio managers can assess each green bond on a case-by-case basis and evaluate it on its merits. If the yield of a new green bond is insufficient while the order book is still open, then they can simply cancel the order. In other words, if the order book is open and the spread continues to narrow due to high demand, investors can withdraw their order at any time.

A recent example of an issue that ACTIAM did not participate in was an environmental bond issued by Nordic Investment Bank (NIB) (0% 30 April 2027, ISIN: XS2326563280). A 6-year green bond, it was announced on 25 March 2021, with an initial spread indication of mid-swap -8 basis points. Nordic is an AAA-rated solid issuer that does not make frequent issues. Our ESG analysts also approved the green bond framework. Due to the rapid growth of the order book (€1.6 billion for a loan of a mere €500 million), the lead managers and the issuer together adjusted the spread downwards. Initially they adjusted it to mid-swap -10 basis points and then to -11 basis points. The spread on NIB’s current green bond, which is due in June 2024, is mid-swap -10 basis points. There was therefore no incentive whatsoever to buy the new green bond in exchange for the existing bond.

At ACTIAM we see that greenium exists, but mostly in the world of smaller corporate bonds rather than in government loans, sub-sovereigns and agencies. Active and flexible portfolio management enables us to prevent financial yield being sacrificed for sustainability. In our opinion, the greenium observed by the Swedish study is far too big, mainly because the researchers lumped all green bonds together. If they had not done so, the results would have been quite different.

We are not alone in thinking this. Jens Peter Sørensen, an analyst at Danske Bank, responded to the Swedish study in November 2020. His main finding was that greenium certainly exists, but that it is not as high as the research paper suggests (Source: Green SSA Bonds. How they have performed during the coronavirus crisis. Jens Peter Sørensen. Danske Bank. November 2020).

His research shows, for instance, that a green bond issued by Kredit für Wiederaufbau (KFW), a German state-owned development bank, 0.25% 06/2025 compared to the non-green KFW 0.00% 09/2025 has a modest greenium of just 1 basis point. The premium for other SSA issuers like KFW is also particularly low. According to Danske’s research, this has more to do with the persistent low interest rate, especially on highly liquid AAA bonds.


There is indeed a greenium when it comes to the market for green bonds. Whether or not to invest in a green bond starts with checking the investment restrictions through a normal analysis of, among other things, the credit quality of the issuer and the size of the green bond. There may also be additional requirements with regard to sustainability (so-called sustainable investment beliefs) against which the green bond must be assessed. Finally, it is important that the compensation on the green bond (the spread versus swaps and versus the outstanding secondary loans) and the tradability are checked and are sufficient to subscribe. If this process is followed step by step, the average spread between green and non-green bonds is much smaller than the 15 to 20 basis points referred to in the Swedish research (especially when it comes to investment grade green bonds). Therefore, financial and social returns can certainly go hand in hand, without sacrificing yield for sustainability.