## How Large is the Sovereign Greenium?

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### Overview and research objective
- Assembles a comprehensive sovereign green bond database and estimates the sovereign greenium.
- Focuses on twin bonds (Germany and Denmark) and a panel regression analysis comparing green and conventional sovereign bonds.
- Motivations: green bonds may provide longer maturities and lower borrowing costs (greenium) to finance climate adaptation and mitigation.

### Twin-bond evidence
- Twin bonds: a conventional bond and a green bond sharing maturity date and coupon; green bond proceeds restricted to green projects; green issuance volume typically smaller and issued later.
- Germany and Denmark issued twin bonds to benchmark the greenium.
- Coupons are zero for all twin bonds.

Key twin-bond statistics (Greenium in basis points as reported in Table 1)
- Germany 2025: mean 2.93; min 0.7; p25 1.9; p50 3.24; p75 3.8; max 5.7
- Germany 2030: mean 2.34; min 0.3; p25 1.8; p50 2.1; p75 2.7; max 4.6
- Germany 2031: mean 3.77; min -2.1; p25 2.0; p50 4.3; p75 5.4; max 6.9
- Germany 2050: mean 3.99; min -0.3; p25 2.5; p50 4.3; p75 5.6; max 9.1
- Denmark 2031: mean 2.92; min -1.4; p25 0.8; p50 2.5; p75 4.6; max 11.6

Findings from twin bonds
- The greenium is mostly positive but small (around 2–4 basis points for Germany; average 3 basis points for Denmark).
- The greenium can be negative at times (for example in Germany 2031 and 2050 series during yield dives).
- Denmark’s first month recorded nearly 5 basis points greenium, with a subsequent downward trend and occasional negative sign in 2022Q3.

### Panel data analysis — data and sample
- Green bond data and local-currency conventional bond data from Eikon; conventional Eurobond data from the IMF Sovereign Spread Monitor.
- Final sample: 23 green bonds issued by 15 countries; 189 conventional bonds and 23 green bonds in estimation; 17 green bonds denominated in euros by 11 countries; three green bonds denominated in US dollars (Chile and Egypt); two green bonds denominated in the UK local currency and one by Sweden in local currency.
- Maturity range for green bonds in sample: minimum 5 years, maximum 32 years; 19 green bonds have maturity longer than 10 years.

Summary statistics and salient features
- Issuance size: sovereign green bond issuance about 2 percent of total sovereign bond issuance in Eikon (2018-2020 average); share grows from 2.6 percent in 2018 to 3.2 percent in 2021. Share and growth larger in EMDEs than in AEs.
- Maturity: average maturity 17 years for green bonds and 12.2 years for conventional bonds (Annex Table 5); maturity difference more pronounced in EMDEs (difference of almost 6 years).
- Yield: average yield of green bonds is 13.2 basis point lower than conventional bonds in AEs and 181.4 basis points lower in EMDEs.

### Regression specification and baseline estimate
- Baseline panel regression:
  y_ijt = α I:Green_ijt + β1 Tenor_ijt + β2 Spread_ijt + γ_j + δ_t + ε_ijt
  - Dependent variable: Z-Spread (number of additional basis points to the Treasury yield curve so that NPV equals market price).
  - I:Green is a dummy for a green bond.
  - Controls: remaining maturity (Tenor), bid-ask spread (Spread), country fixed effects (γ_j), time fixed effects (δ_t).
- Interest: estimate of α measures the greenium (difference in Z-Spread of green versus conventional bonds controlling for maturity and liquidity).

Greenium estimation results (Table 2 coefficients; standard errors in parentheses)
- Column (1) Dependent = Z Spread All EUR/USD:
  - Green -4.06 (0.74)
  - Remaining Tenor (months) 0.24 (0.00)
  - Bid-Ask Spread (BPS) 0.75 (0.11)
  - Country FE YYYY; Week FE YYYY; Currency FE YYYY
  - R2 0.85
  - Bond-Day 70,839
  - Bonds 118
  - Green Bonds 23
  - Countries 15
- Column (2) Dependent = Z Spread EUR/USD:
  - Green -3.66 (0.78)
  - Remaining Tenor (months) 0.24 (0.00)
  - Bid-Ask Spread (BPS) 0.68 (0.11)
  - R2 0.85
  - Bond-Day 65,349
  - Bonds 100
  - Green Bonds 20
  - Countries 13
- Column (3) Dependent = Z Spread AEs:
  - Green -2.74 (0.18)
  - Remaining Tenor (months) 0.12 (0.00)
  - Bid-Ask Spread (BPS) 0.56 (0.04)
  - R2 0.89
  - Bond-Day 40,880
  - Bonds 71
  - Green Bonds 7
  - Countries 14
- Column (4) Dependent = Z Spread EMDEs:
  - Green -11.55 (1.41)
  - Remaining Tenor (months) 0.36 (0.01)
  - Bid-Ask Spread (BPS) -0.27 (0.15)
  - R2 0.87
  - Bond-Day 29,959
  - Bonds 47
  - Green Bonds 15
  - Countries 8
- Significance indicators:  p<0.1,  p<0.05,  p<0.01

Interpretation of regression results
- Estimated average greenium (Column (1)) is -4.06 basis points (i.e., green bonds have a Z-Spread lower by 4.06 basis points relative to conventional bonds after controls).
- By development status:
  - AEs: greenium -2.74 basis points on average.
  - EMDEs: greenium -11.55 basis points on average (larger greenium in EMDEs).
- Robustness: restricting to euro- and USD-denominated bonds yields greenium -3.66 basis points (Column (2)), indicating results are not driven by currency risk premia.

### Additional country- and synthetic-estimation findings
- Country estimates (no country fixed effects): greenium positive in 12 out of 15 countries.
  - Egypt: greenium 30 basis points (particularly high).
  - Hungary: greenium 20 basis points.
- Synthetic estimation method:
  - Predicts the Z-Spread of a counterfactual conventional bond using coefficients from regressions on conventional bonds.
  - For euro-denominated green bonds, median estimated greenium increases over time despite larger dispersion (possibly due to more bonds being issued).
  - USD-denominated green bonds also show an upward trend in greenium over time.

### Conclusions and policy implications
- Sovereign greenium is positive but not large on average; evidence indicates growth in greenium over time alongside increased sovereign green bond issuances.
- Key quantitative takeaways:
  - Average greenium across full sample: 4.06 basis points.
  - Average greenium in AEs: 2.74 basis points.
  - Average greenium in EMDEs: 11.55 basis points.
  - Twin-bond averages: Germany ~2–4 bps depending on maturity; Denmark ~3 bps.
  - Issuance share of sovereign green bonds: about 2 percent of total sovereign issuance (2018-2020 average), rising from 2.6 percent in 2018 to 3.2 percent in 2021.
  - Average maturity: green bonds 17 years; conventional bonds 12.2 years.
  - Average yield differences: green bonds 13.2 basis point lower in AEs and 181.4 basis points lower in EMDEs (summary statistics).
- Policy considerations:
  - Whether administrative costs of green bond issuance exceed benefits is country-specific.
  - Strengthening peer learning and climate information architecture could help reduce issuance costs and increase benefits over time.
  - Open questions remain: the role of the purpose of the project in determining greenium, and whether green bonds deliver intended climate outcomes.

*How Large is the Sovereign Greenium? (WP/23/80), Sakai Ando, Chenxu Fu, Francisco Roch and Ursula Wiriadinata, April 2023*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023080-print-pdf.pdf_