06/10/2023
The European Securities and Markets Authority (ESMA), the EU’s financial markets and securities regulator, today publishes an article on the European sustainable debt market, analysing the existence of an ESG pricing effect (‘the Greenium’) across different types of sustainable-labelled debt instruments.
In the article, ESMA notes that it cannot confirm a systematic pricing benefit for any ESG-labelled debt type as of March 2023. However, issuers of ESG bonds did benefit from a statistically significant pricing in the past driven by their issuer-level ESG credentials.
The sustainable-labelled debt market
Issuance of sustainable-labelled debt has rapidly increased over the last years (+28% in one year in 1H23 and +663% since 1H18), and the variety of debt instruments with a sustainability aspect introduced to the market has increased.
Existing research suggests that sustainable-labelled debt issuers may benefit from a pricing advantage, often dubbed ‘the Greenium’, meaning that investors would accept lower yields in exchange for the sustainability profile of the bond or the issuer. The evidence is however not conclusive and largely focuses on green bonds only.
This article therefore analyses the existence of an ESG pricing effect for various types of ESG-debt instruments, beyond only green bonds, and further investigates if issuer-level ESG credentials can serve as an explanatory variable to explain the phenomenon. ESMA’s analysis also includes an overview of the current state of play of the European sustainable debt market and provides details about how ESG characteristics have in the past and present impacted bond pricing differences. The assessment was conducted for a total dataset of 8,696 bonds from issuers domiciled in the EEA, with a combined outstanding face value of EUR 3.7tn.
As the sustainable debt market continues to evolve steadily, and considering that this analysis looks at a specific sample of outstanding bonds, these results should not be interpreted as a general rejection regarding the possibility of pricing advantages related to sustainable debt instruments. ESMA will continue to monitor these and related market developments in the future.
Background
This topic is of relevance to ESMA in terms of both its financial stability and investor protection mandate, since significant price distortions can trigger increased levels of volatility and rapid reductions in asset prices. Additionally, if issuers benefit from a pricing advantage based on a sustainability character, which proves to be inaccurate, investors may feel mislead, which can subsequently hamper investor trust.
This analysis focuses on the financial stability angle and informs ESMA’s regulatory and supervisory work by assessing potential pricing distortions in the ESG debt market and thus investigating if the greenium phenomenon can trigger financial stability concerns. By doing this, ESMA aim to identify the potential for financial stability concerns at an early stage and to contribute to the ESMA strategic priority of monitoring key market developments in the area of sustainable finance.