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ESMA warns green premium for debt is unclear

© Shutterstock / PeachShutterStockSustainable finance.

The European Securities and Markets Authority (ESMA) has said there is no evidence of a recent greenium for sustainable debt, although there is statistical evidence supporting it historically.

  • ESMA undertook an assessment of evidence of a green premium in sustainable debt.
  • There was no indication of a systematic premium for ESG-labelled debt, but there was statistically significant evidence of pricing benefits associated with the ESG reputation of the issuer.
  • While there is conflicting evidence in the market, predominantly on green bonds, ESMA seems to be suggesting that issuers with positive ESG reputations do benefit in cost of capital.

Global climate and nature commitments have been driving the financial sector to outline multi-trillion-dollar funding plans to drive capital towards green investments and projects. Yet there has been increasing criticism of the names of funds, and use of proceeds, which do not always go hand in hand with stated goals. There have also been instances of sustainability-linked funds being raised for the development of high emitters, and for projects which do not align with the Paris goals.

As criticism increases, so do the chances that investors will get cold feet about the sector, or feel that they have been misled. In its role of ensuring market stability, the EU’s financial markets and securities regulator has published some analysis of the European sustainable debt market. The analysis assesses the existence of an ESG pricing effect (a green premium or ‘greenium’) across different types of sustainable-labelled debt instruments.

ESMA noted that it cannot confirm a systematic pricing benefit for any ESG-labelled debt type as of March 2023. Issuers of ESG bonds, however, did benefit from 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 the first half of 2023 and +663% since the first half of 2018), and the variety of debt instruments with a sustainability aspect introduced to the market has increased.

Overall the speed of market growth continues to increase. Moody’s last sustainable finance quarterly update said that global sustainable bond issuance has the potential to eclipse the initial 2023 forecast of $950 billion, despite challenging markets. It also pointed out that sustainable bonds now represent 15% of the total global bond market.

Moody’s also said that total sustainable bond issuance hit $526 billion in the first half of 2023, up 7% from the same period in 2022 despite a decline in overall bond issuance. This shows resilience in sustainable finance, as companies with strong sustainability approaches are showing greater adaptability to market pressures.

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.

Moving beyond green bonds

ESMA therefore analysed the existence of an ESG pricing effect for various types of ESG-debt instruments, beyond only green bonds, and further investigated if issuer-level ESG credentials can serve as an explanatory variable to explain the phenomenon.

ESMA’s analysis also included 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 €3.7 trillion.

As the sustainable debt market continues to evolve steadily, and considering that the analysis looked at a specific sample of outstanding bonds, ESMA warned that the results should not be interpreted as a general rejection regarding the possibility of pricing advantages related to sustainable debt instruments. ESMA said it will continue to monitor these and related market developments in the future.

Why does such analysis matter?

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 misled, which can subsequently hamper investor trust.

The analysis focused on the financial stability angle and is to be used to inform 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 aims 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.

In order to ensure that the findings are well understood, ESMA is organising a public webinar on 18 October on the analysis, when the authors of the article will be available for a Q&A session. The webinar will also include a presentation on ESMA’s recent work on the names of ESG funds with the TRV Article: ESG names and claims in the EU fund industry.


The question of whether or not corporate sustainability results in a lower cost of capital is a big deal. ESMA is correct to warn that if investors are prepared to cover a ‘greenium’ and bonds perform badly, they may feel misled. But there is also the issue that terminology has been fairly loose until fairly recently and, as investors get more savvy and the market becomes more transparent, this issue may be resolved.

What is interesting is the fact that it found a statistically significant impact on yield dependent on the ESG credentials of the issuer – if investors aren’t clear on what the bond capital will be used for, they appear to be trusting of those companies with credible credentials. That’s a positive signal for sustainable finance overall – and for companies paying for sustainability with time, effort and business change, this is a useful sign that their work is being recognised and rewarded.

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