This year, capital markets have been adopting a new term: ‘greenium’. The word, which perhaps is more reminiscent of horticulture than finance, refers to the premium that investors have been willing to pay to hold assets related to environmental, social and governance (ESG) factors.
The term has been around for a while, cropping up in industry and academic articles, but it looks like it may have gathered some momentum over the past 12 months. In a recent research note, BNP Paribas went as far as calling 2020 the year of the greenium. It found that between January and the beginning of November, investors in green, social or sustainable bonds were willing to pay up to 7 basis points more than they would for ‘regular’ bonds. In 2019 this differential was only 2 basis points. This sounds promising. But it may be premature to view it as a real turning point for sustainability.
Still small
First, the size of the ESG market is still a miniscule fraction of the overall bond market, as BNP Paribas acknowledges. The aggregate volume of outstanding investment grade bonds defined as green, social or sustainable (a combination of the previous two) is 6.4% of the total for euro-denominated notes; it is even smaller for dollar issuances, at 1.4%, according to data from BNP Paribas, Bloomberg and IHS Markit.
Things may change, at least in Europe, as the EU is working on green bond standards, centring them around the green taxonomy that has come into force this year. The suite of EU rules may end up attracting greater investor numbers as they bring certainty and impose greater transparency on the European market. Their full implementation, however, may only take place in 2022.
Further, if greater demand leads to greater supply, how big does the greenium need to be for more companies to look at this area — and to do so more convincingly? In spite of business leaders’ stated growing support and awareness of ESG, issuance data suggest that they have not been able or willing to raise capital based on those principles.
Non-essential
There is more. While investors generally seem to agree that companies that have good ESG metrics deserve a premium, whether on their debt or equity valuations, many of them still view sustainability as a nice-to-have, not a necessity. Between early September and early October, consultancy Edelman polled 600 professionals including portfolio managers, chief investment officers, financial analysts and stewardship officers across the US, Canada, the UK, Germany, the Netherlands and Japan, representing firms that manage an aggregate of more than $20tn of assets: 79% of them said that they had deprioritised ESG as an investment decision because of the economic fallout of Covid-19.
Many, in finance and business, have been arguing to the contrary — that the pandemic has made the world much more aware of the immediate necessity to look at new types of risks and of the need to evaluate companies’ financial value differently. Nearly all survey respondents (92%) agreed that companies with strong ESG performance deserve a share price premium.
So on the one hand, investors see the value of sustainability, the greenium; on the other, ESG will not sway their decisions in a time of crisis. On the one hand, companies are increasingly vocal about the need to look at their environmental and social impact, particularly during this crisis; on the other, they still do not raise financing, in any substantial way, based on ESG factors.
It may be cognitive dissonance. It may be a human tendency to revert to known paths in an emergency. But it might also be that, as things stand, the case for sustainability is still not urgent enough.
Silvia Pavoni is the economics editor at The Banker.
