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ESMA Unveils Analysis of ESG Pricing Effect: Potential Benefits for Issuers

The European Securities and Markets Authority (ESMA), the EU’s financial markets and securities regulator, released a report examining the European sustainable debt market. It analyzes the existence of an ESG pricing effect (‘the Greenium’) across different types of sustainable-labelled debt instruments.

ESMA published that while ESG bonds issuers did benefit from statistically significant pricing in the past, it cannot confirm yet a systematic pricing advantage for any ESG-labelled debt type as of March 2023.

The sustainable-labelled debt market

Issuance of sustainable-labelled debt has rapidly increased over the last years (+28% in 1H23 and +663% since 1H18), and the variety of debt instruments with a sustainability aspect introduced to the market has increased.

Existing research suggests that sustainable-labelled debt issuers may benefit from a pricing advantage, often dubbed ‘the Greenium’, indicating that investors would accept lower yields in exchange for the sustainability profile of the bond or issuer. However, the evidence is not conclusive, and primarily focuses on green bonds.

The report shows the existence of an ESG pricing effect for different types of ESG-debt instruments, beyond green bonds, and further explores whether ESG characteristics at the issuer level can serve as an explanatory variable to explain the phenomenon. ESMA's analysis also includes an overview of the current state of the European sustainable bond market and highlights how ESG characteristics have influenced bond price differentials in the past and present. The assessment was conducted on a dataset of a total of 8,696 bonds from issuers based in the EEA, with a total outstanding face value of EUR 3.7 billion.

The results do not exclude pricing benefits associated with sustainable debt instruments. ESMA will continue to monitor these and similar market developments in the future, as the sustainable debt market is constantly evolving and this analysis looks at a specific sample of outstanding bonds.

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