The costs and benefits of green bond issuance and investment

GRESB Green Bond Working GroupThird meeting

© 2015 GRESB B.V.

Background: cross sector researchPerformance based studies

Minimal research on green bond performance- Bloomberg (2014) and Barclays (Sept. 2015)Bloomberg study found no systematic spread differential at issue, nor spread tightening over timeBarclays study suggests investors pay a green premium of 16-18 bps compared to grey (or non-green) bonds. Green bonds may be less risky/volatile than grey bondsBoth studies based on self-constructed green bond indices; neither bond nor industry specific

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Introduction: real estate corporatesPerformance based studies

No publicly available research focused on real estate specific issuers7 unique issuers within CRE universeOnly 3 of 7 have issued more than one green bondGreen bonds tend to fit within each issuer’s overall debt structure:

Rate type: fixed or floating (majority are fixed)Issue amount: in line with grey bond issuesMarket: currency and market consistent

Closer look at 12 bond pairs from 4 unique CRE issuers

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CouponsWithin CRE green bond universe- 7 unique issuers

3 usable pairs from unique issuers illustrate green coupons > grey couponsPairs defined- grey/green bond with similar issue date and maturity (< 2 months)When issue/maturity range is expanded to 6 months, green coupons are higher in 60%, lower in 40% of pairs

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0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Issuer (I) Issuer (II) Issuer (III)

Coup

on Grey

Green

VolatilitiesWithin CRE green bond universe- 7 unique issuers

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Green/grey bond pairs from 2 unique CRE issuers Pairwise analysis suggests:

Green bond volatilities are equal or greater than same issuer grey (or non-green) bondsInconclusive pattern

0

1

2

3

4

5

6

7

8

Green (Pair 1) Grey (Pair 1) Green (Pair 2) Grey (Pair 2)

-1m

-2m

-3m

Yields: issuer-specific term structureWithin CRE green bond universe- 7 unique issuers

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Single example of CRE issuer term structureSimilarly, for majority of CRE issuers, green bond yields are above grey bond trend lineThis trend was persistent for almost all (6/7) CRE issuers since Q2 2015

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

0 5 10 15 20

Yiel

d

Adjusted maturity

Green

Grey

Expon. (Grey)

Within CRE green bond universe- 7 unique issuers

6

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

12/4/15 12/11/15 12/18/15 12/25/15 1/1/16

Grey

Green

3.9

4

4.1

4.2

4.3

4.4

4.5

12/4/15 12/11/15 12/18/15 12/25/15 1/1/16

Grey

Green

Pairwise analysis suggest that higher yields are not persistent in all cases at all times.

Yields: pair comparison for 2 unique issuersIssuer 1 Issuer 2

ConclusionWithin CRE green bond universe- 7 unique issuers

CRE green bond issues fit within the overall bond strategy of each issuer (amounts, rate types, currencies, markets) Although some CRE issuers have realized lower pricing (coupons) for green vs. corresponding grey issues, pairwise analysis finds opposite resultHigher volatilities may be due to strong investor demand and buy and hold strategies Issuer specific term structure hints at higher green yields, but pairwise comparison is inconclusive

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