Investor Appetite Drives Pricing Benefits for Sustainability-Linked Bond (SLBs)

Investor appetite leads to price advantages for sustainability-linked bonds (SLBs)

SLB issuers rejoice in Greenium – Latest analysis of climate bonds

London: 09/21/2022: 09:00 GMT+1: In a unique analysis, Climate Bonds has examined the price dynamics of sustainability-linked bonds (SLBs). Qualifying SLBs issued in 2021 and H1 2022 were examined to determine if there was evidence of Greenium. Within the sample of 37 SLBs, 14 reached a Greenium consisting of 11 USD denominated and 3 EUR. Eleven of the SLBs that received a Greenium were assessed in 2021 and three in 2022.

The SLB market has grown rapidly since Chinese infrastructure company Beijing Infrastructure Investment Co. priced the first instrument with a coupon step-up linked to the achievement of social key performance indicators (KPIs) in 2018. By the end of the first half of 2022, climate bonds recorded an SLB volume of USD 176.6 billion.

SLBs are general-purpose debt securities tied to improved corporate-level sustainability performance. They have been hailed for attracting a wide range of issuers to sustainable financial markets. However, it was also pointed out that the strength of the environmental indicators (KPIs) that form the basis of these bonds can vary in level of ambition.

The report’s latest findings show that demand for SLBs remains strong and suggest that investors are willing to support a wide range of issuers on their journey to net zero.

The Green Bond Pricing in the Primary Market H1 2022 Report, released today, is the 14th installment in a leading series analyzing green bond pricing dynamics and how these instruments offer price advantages for investors and issuers alike. These price advantages are expected to continue with regulatory changes and an increased emphasis on responsible investing.

Sean Kidney, CEO, Climate Bonds Initiative:

“As the world faces the imminent threat of climate collapse, the large-scale climate earmarking of capital marks a necessary evolution for the financial sector to embrace. These results show that investors are striving to fund the clean companies of the future, and the corporate world needs to take notice.”

“The market for sustainability linked bonds has developed very dynamically in recent years. The market offers a great opportunity for large emitters to reduce climate impact, but commitments need to be ambitious. Climate Bonds is working to create standards for the market that can guide best practice investments for a Paris-centric future.”

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Five highlights from the half-year report 2022

  1. Green bonds showed strong price momentum in the primary market compared to vanilla equivalents

Qualifying Green Bonds achieved larger book coverage and strong spread compression during bookbuilding compared to vanilla equivalents. These metrics are undoubtedly contributing to tighter green bond pricing. While the high volatility of the first half made it more difficult to pinpoint a greenium, it found that 20% of the bonds were priced within their own yield curves. This shows the value for issuers.

  1. Green bonds tightened in the immediate secondary market

After 7 and 28 days, green bonds tightened more than vanilla baskets and corresponding indices. This is the continuation of a trend observed over several years. This offers investors added value.

  1. Green bonds provide better liquidity in the secondary market

Climate Bonds used data provided by Tradeweb to determine whether green bonds offered investors a different secondary market liquidity profile in the first half of 2022 than comparable off-the-shelf products. The data showed that green bonds offered more liquidity compared to those in other categories and offered investors flexibility where needed. This could help investors justify tighter green bond pricing in the primary market.

  1. More EUR bonds from the real estate and utilities sectors were green than not

The EUR real estate bonds included in the analysis were among the strongest performers straight away. In the utilities sector, non-green bonds are in the minority. Strong definitions have encouraged productive issuance in these sectors and investors of all stripes cannot afford to ignore green bonds. US culture and politics need to catch up to ensure green investments are prioritized.

  1. Sustainability-linked bonds show the greenium

For the first time, Climate Bonds has examined the pricing of USD and EUR Sustainability Linked Bonds (SLBs) in its flagship Bond Pricing report series. The result of this analysis suggests that SLBs can help issuers to achieve price advantages in the primary market. Currently, this appears to be more prevalent in USD-denominated instruments, where there is less choice of large green UoP (UoP) bonds with adequate transparency. Climate Bonds concludes that investors are ready to support a wide range of issuers on their journey to net zero.

Read the report for a full breakdown of green and sustainability-related bond price analysis.

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Webinar: Join us for the results of our fourteenth report in our pricing series, where our expert panel of investors and issuers get behind the numbers.

September 21, 2022 at 9:00 am NYC / 2:00 pm London / 3:00 pm Paris

to register

For more informations:

Acknowledgments: Green Bond Pricing in the Primary Market H1 2022 was created with funding support from Tradeweb.

Notes for journalists:

About the Climate Bonds Initiative: The Climate Bonds Initiative is an investor-focused not-for-profit organization that encourages large-scale investment in the low-carbon economy. More information on our website here.

Price series: The climate bond price reports were launched in 2016 and have been produced regularly ever since. You can find previous reports here.

Methodology: This paper contains featured Green Bonds issued in H2 2021. Designated green bonds that meet the following specifications are included:

  • Price date between 01/01/2022 and 06/30/2022
  • Currency: EUR or USD
  • Benchmark size ie >= $500m USD
  • Investment grade rated
  • Minimum maturity of three years upon issuance
  • Compliant with the Climate Bonds Taxonomy and included in the Climate Bonds Green Bond Database

Amortizing, perpetual, floating rate and other non-vanilla structures were excluded. These parameters are designed to capture the most liquid part of the market without limiting the variety of data. All historical data is based on asset swap spreads for bonds denominated in EUR. USD bonds are compared to a US Treasury curve. All historical data is from Refinitiv EIKON.

Comparable baskets include bonds issued in the same quarter as the green bond in question. Comparable bonds must meet the parameters described above, except that they are not labeled and the use of proceeds is not explicitly green. Baskets include the best possible matches based on the following considerations in order of priority: a) currency, b) market type (EM/DM/Sukuk), c) no other subject designation, d) seniority, e) tenor, f) credit rating and g) Sector, among the bonds issued in the same quarter.

If appropriate ties cannot be found, best efforts are made to find suitable alternatives from the available sample. The resulting baskets indicate how the money could have been invested in the same quarter that the green bond was issued. The number of bonds in each basket ranges from one to ten bonds. Bonds behave differently depending on when they are issued, and geopolitical events can affect bond prices from one day to the next. This proxy was designed to circumvent the fact that vanilla bonds and green bonds with similar characteristics are rarely issued on the same day.

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Citation suggestion:

Harrison, C., Green Bond Pricing in the Primary Market H1 2022 Climate Bonds Initiative, September 2022

More information:

Climate Bonds Market Intelligence will be expanding its screening database to include SLBs in the coming months.

Additionally, we have proposals for the structural extension of the Climate Bonds Standard and Certification Scheme to certify non-financial corporations* and SLBs issued by non-financial corporations are now open for public consultation.

These developments build on the foundations set out in our landmark document Financing Credible Transitions and more recently Transition Finance for Transforming Companies.


Disclaimer: The information contained in this release does not constitute investment advice of any kind and the Climate Bonds Initiative is not an investment advisor. Any reference to a financial organization, debt instrument or investment product is for informational purposes only. Links to external websites are for informational purposes only. The Climate Bonds Initiative accepts no responsibility for the content of external websites.

The Climate Bonds Initiative does not endorse, recommend or give advice regarding the financial merits or otherwise of any debt securities or investment products and no information in this release should be construed as such, nor should any information in this release be relied upon in making any investment decision.

Certification to the Climate Bond Standard reflects only the climate attributes of the use of proceeds from a designated debt instrument. It does not reflect the creditworthiness of the debt instrument referred to nor its compliance with national or international laws.

The decision to invest in anything is yours alone. The Climate Bonds Initiative shall have no liability whatsoever for any investment made by any person or entity, nor any investment made by any third party on behalf of any person or entity, based in whole or in part on the information contained herein, or any other public communication of the Climate Bonds Initiative.

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