“Green” investing is a big business. Virtually every brokerage firm offers a slew of financial products aimed at environmental improvement — green mutual funds, green stocks, green bonds, and green exchange-traded funds.
Morningstar, the investment research firm, identified a record 351 “sustainable” stock and bond funds in 2018, a 50% jump from the year before. Those funds managed $161 billion in assets.
But while it’s clear that there is a growing appetite among investors to go green, a rigorous new study finds that people aren’t willing to pay a premium — or “greenium” — just for the satisfaction of doing so.
The new study, by David Larcker and Edward Watts at Stanford Graduate School of Business, finds that municipal bond investors demanded exactly the same returns for green municipal bonds as for virtually identical non-green bonds issued on the same day by the same municipality.
In fact, the study shows it costs more for cities and towns to sell green bonds than to sell ordinary bonds for highways or bridges.
“There’s a lot of hype and rhetoric, but there’s a big underlying controversy about whether investors would accept a lower return for green investments,” says Larcker, a professor of accounting and director of the Corporate Governance Research Initiative right at Stanford GSB. “At least for local governments in the bond market, there is no benefit to being green. In fact, it’s the opposite.”
Hunting for the Elusive Greenium
Until now, Larcker says, it’s been difficult to accurately measure greeniums because it’s been almost impossible to isolate the green factor when accounting for price differences between similar investments.
To solve that problem, Larcker teamed up with Watts, a PhD student, to analyze billions of dollars in municipal bonds that were identical in almost every respect to other ordinary municipal bonds except for their environmental purpose.
Local governments issue “green bonds” for environmentally friendly projects, such as parks and waste recycling systems. Green bonds don’t offer any tax advantages over ordinary municipal bonds, but they are usually for projects that have been independently certified as good for the environment.
As it happens, local governments often simultaneously issue tranches of both kinds of bonds. That makes it possible to compare the prices and yields of green bonds with those of otherwise identical regular bonds. Both kinds were issued by the same local government, on the same date, with the same maturity and bond rating.
By comparing the prices that investors paid and thus the effective annual interest rate or yield they received, the researchers were able to tell whether investors were paying somewhat higher prices for green bonds — a greenium — and receiving lower yields.
They were not. Comparing 640 matched pairs of bonds, Larcker and Watts found virtually no difference at all. The overall difference in yield was an infinitesimally small 0.45 basis points (100 basis points equals 1 percentage point of interest). For 85% of the pairs, in fact, investors received exactly the same yield.
The researchers also found that green bonds are somewhat more expensive to issue. On average, they found, investment banks were charging about 10% to underwrite green bond offerings, apparently because they are perceived as somewhat more complicated to market. The additional fees, as well as the cost of getting a project certified as eco-friendly, are borne by the municipalities.
Larcker cautions that the paper doesn’t address the question of whether investors can earn higher returns from companies with better environmental practices. Studies so far are all over the map on that.
But for companies and organizations trying to raise money, the study appears to show that investors are still mainly interested in the old-fashioned kind of green — money.