The greenium: pricing of green bonds

If many investors want green bonds and there are not enough of them, buyers compete and push the price up. A higher price means a lower yield. The gap between the yield on a green bond and the yield on an otherwise identical normal bond is called the greenium (green premium).

For the issuer, a greenium means slightly cheaper borrowing. For the investor, it means giving up a little return in exchange for the label.

In practice, the greenium is usually small, often a few basis points, and it changes over time. Sometimes it disappears or even turns negative, for example when green bonds are hard to trade. So it is best treated as a market signal of investor demand, not as a reliable source of savings.

Formula

Greenium (basis points) = (Yield on a comparable conventional bond minus Yield on the green bond) × 100

A positive greenium means the green bond yields less, so the issuer borrows more cheaply.

Ways to measure it

1. Twin bonds. The cleanest case. Germany issues green federal bonds as "twins" of existing conventional bonds with the same coupon and maturity, so any yield gap is due to the label and to liquidity.
2. Matched pairs. Compare a green bond with a conventional bond from the same issuer, with the same seniority, currency and a similar maturity.
3. Interpolated curve. Build the issuer's conventional yield curve and read off the yield at the green bond's exact maturity. This is the usual method for sovereign green bonds.
4. At issue versus in trading. The primary market greenium (at the auction or book-build) can differ from the secondary market greenium (when the bond trades later).

Forces that push the greenium up

• Investors with green or ESG mandates who must hold labelled bonds.
• Limited supply of green bonds in a given currency or sector.
• A high-quality label, such as certification against a strict standard.

Forces that push it down

• Poor liquidity. If a green bond is harder to sell, investors want a higher yield, which offsets the greenium.
• A narrow investor base. In India, banks, insurers and pension funds are the main bond buyers, and few have green mandates.
• Doubts about the label.

Evidence from India

• First sovereign green bonds (2023): one estimate puts the greenium on the first 10-year bond at about 9 basis points against the benchmark yield on the issue date.
• FY 2024-25: several sovereign green bond auctions were cancelled, partly accepted or largely devolved on primary dealers because banks would not accept the low yields the government wanted on 10-year bonds.
• Typical size: an Angel One analysis in February 2025 said Indian sovereign green bonds often achieved a greenium of about 2 to 3 basis points.
• August 2026: Reuters estimated a greenium of about 4 basis points on ₹5,000 crore of 30-year sovereign green bonds sold at a cut-off yield of 7.3169%.
• Municipal green bonds: a March 2025 CEEW study found that city green bonds borrowed about 50 basis points more cheaply than non-labelled municipal bonds, but it warned that the data set is small and the saving is not proven to be caused by the label.
• Corporate bonds: the CFA Society India report of March 2026 described the pricing benefit for Indian corporate green bonds as small and shrinking over the past couple of years.

Effect on cost of capital (illustrative)

A hypothetical company has debt equal to 40% of its capital. Half of its debt is green, with a greenium of 5 basis points. Its tax rate is 25.17%.

• Fall in the average pre-tax cost of debt = 50% × 5 = 2.5 basis points
• After tax = 2.5 × (1 minus 0.2517) = about 1.9 basis points
• Fall in WACC = 40% × 1.9 = about 0.75 basis points

That is less than one hundredth of a percentage point. The value effect of a green label almost always comes from cash flows and risk, not from the greenium.