Do issuers benefit from an ESG pricing effect?
The European Securities and Markets Authority (ESMA) provides a comprehensive analysis of the European sustainable debt market by analysing whether issuers of ESG bonds benefit from a pricing advantage, often referred to as the greenium.
The conclusions of this study include:
- The issuance of sustainable-labelled debt has significantly increased over the years, driven by growing investor interest in financial products with sustainability credentials.
- The market size of sustainable debt by issuers domiciled in the European Economic Area has grown substantially, reaching EUR 1.7 trillion in the first half of 2023, a growth of 130% in only two years.
- There is no evidence of a systematic and consistent pricing advantage for any ESG bond category. The most common drivers for bond prices and yields remain credit risk, maturity and liquidity risk.
- Even without a consistent greenium, some investors may be willing to forgo returns to support sustainability under specific conditions, but this study could not define them accurately.
- Issuers of ESG bonds benefitted in the past from pricing premiums based on their characteristics or that of their bonds, but not their public sustainability commitments.
- A systematic greenium raises potential concerns, such as price distortions in the market and financial stability issues if the sustainability aspect driving the pricing premium proves to be inaccurate.
More research is required to understand why some investors are willing to forgo returns for the sake of sustainability and how sustainable factors are priced in.
It would also be valuable to explore the potential financial stability concerns related to pricing advantages for sustainable financial products and their behaviour compared to mainstream ones.