Who pays the greenium and why? A decomposition

Abstract

The average yield differential between a green and a matched conventional bond (“greenium”) is statistically and economically significant and amounts to roughly minus 3 basis points. We decompose this greenium along the bonds’ ownership structure and document that investment funds, banks and insurance companies pay most of it. Dissecting further, the greenium paid by investment funds (and their clients) is mostly explained by an average level effect, confirming the narrative that these investors have non-pecuniary sustainability preferences. The greenium paid by banks is markedly different and cannot be explained by such preferences. Rather banks both overweight specific green bonds with a sizable greenium and underweight green bonds without any sizable greenium, pointing towards an interaction between the greenium and bank-related financial frictions.