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AB: ESG-Labeled Bonds: Are Greeniums Doomed To Dwindle?

AB: ESG-Labeled Bonds: Are Greeniums Doomed To Dwindle?

Published 08-16-23

Submitted by AllianceBernstein

Info graph bar chart The Decline in Average Greeniums Has Coincided with Greater ESG-Labeled Bonds Issuance over years 2018-2022.

Investors in ESG-labeled bonds expect well-structured issues with strong green or social credentials to command higher prices than the same issuer’s conventional bonds. This price premium, known as the “greenium,” seems to have been shrinking over time (Display). But factor in metrics such as quality and volume of issuance per vintage year, and a more nuanced picture emerges.

Although it’s common knowledge that the average greenium across major bond indices has decreased in recent years, the significance of issuance year (vintage) for greeniums is less well understood. But vintage year is important, because both the issuance levels of ESG-labeled bonds and the quality of their ESG proposition have varied significantly over time.

The decline in average greeniums has been driven primarily by two related factors: the increased issuance of ESG-linked bonds and the coinciding decline in quality of the ESG proposition across many of the newer issues. We can see the changes in both factors more clearly when we analyze vintage years.

We find that many older ESG-labeled bonds issued in the 2018–2019 era have maintained their greeniums over time. These include issues from pioneering financial institutions and best-in-class European names.

By contrast, issuers who more recently jumped on the ESG bandwagon generally issued less-well-structured bonds that command negligible greeniums.

As always with ESG-labeled bonds, it’s important to appraise each issue individually, because these securities’ characteristics vary so much, both within each sub-category and from bond to bond. The only way to determine whether an ESG-labeled bond deserves its greenium is by thorough fundamental analysis.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

Learn more about AB’s approach to responsibility here

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AllianceBernstein

AllianceBernstein

AllianceBernstein (AB) is a leading global investment management firm that offers diversified investment services to institutional investors, individuals, and private wealth clients in major world markets.

To be effective stewards of our clients’ assets, we strive to invest responsibly—assessing, engaging on and integrating material issues, including environmental, social and governance (ESG) considerations into most of our actively managed strategies (approximately 79% of AB’s actively managed assets under management as of December 31, 2024).

Our purpose—to pursue insight that unlocks opportunity—describes the ethos of our firm. Because we are an active investment manager, differentiated insights drive our ability to design innovative investment solutions and help our clients achieve their investment goals. We became a signatory to the Principles for Responsible Investment (PRI) in 2011. This began our journey to formalize our approach to identifying responsible ways to unlock opportunities for our clients through integrating material ESG factors throughout most of our actively managed equity and fixed-income client accounts, funds and strategies. Material ESG factors are important elements in forming insights and in presenting potential risks and opportunities that can affect the performance of the companies and issuers that we invest in and the portfolios that we build. AB also engages issuers when it believes the engagement is in the best financial interest of its clients.

Our values illustrate the behaviors and actions that create our strong culture and enable us to meet our clients' needs. Each value inspires us to be better: 

  • Invest in One Another: At AB, there’s no “one size fits all” and no mold to break. We celebrate idiosyncrasy and make sure everyone’s voice is heard. We seek and include talented people with diverse skills, abilities and backgrounds, who expand our thinking. A mosaic of perspectives makes us stronger, helping us to nurture enduring relationships and build actionable solutions.
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  • Speak with Courage and Conviction: Collegial debate yields conviction, so we challenge one another to think differently. Working together enables us to see all sides of an issue. We stand firmly behind our ideas, and we recognize that the world is dynamic. To keep pace with an ever changing world and industry, we constantly reassess our views and share them with intellectual honesty. Above all, we strive to seek and speak truth to our colleagues, clients and others as a trusted voice of reason.
  • Act with Integrity—Always: Although our firm is comprised of multiple businesses, disciplines and individuals, we’re united by our commitment to be strong stewards for our people and our clients. Our fiduciary duty and an ethical mind-set are fundamental to the decisions we make. 

As of December 31, 2024, AB had $792B in assets under management, $555B of which were ESG-integrated. Additional information about AB may be found on our website, www.alliancebernstein.com.

Learn more about AB’s approach to responsibility here.

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