Green bond premium in floating rate notes - Evidence from primary and secondary markets

Abstract

This thesis investigates the pricing of green floating rate notes (FRNs), a segment largely overlooked in existing green bond literature. While prior research focuses on fixed-coupon bonds, we extend analysis to FRNs in both the primary and secondary markets to assess whether green bond premiums (“greenium”) persist in floating interest rate structures.

To estimate the greenium in the primary market, a fixed effects model is applied to a comprehensive panel of over 30,000 floating rate bonds issued from 2015 to 2025. In the secondary market, green and conventional bonds are matched into 115 bond pairs to better isolate the impact of a bond’s green label over 39,000 trading days. Greenium is measured as the differences in quoted margins at issuance and discount margins during trading, while controlling for bond characteristics, issuer-specific factors, and market conditions.

Results show a small negative greenium of 7 basis points at issuance, which implies that green FRNs may have a slight pricing advantage at issuance. However, primary market greeniums are somewhat sensitive to outliers, concentrated in supranational and financial issuers, and may have been diluted as the green bond market matured. Evidence in the secondary market is limited, with results suggesting no pricing advantage for green FRNs.

These findings suggest that green bond premiums in FRNs may be conditional on issuer type and market maturity. For issuers, this implies that green pricing benefits in FRNs may be limited and increasingly dependent on credible signaling of green commitments, while investors should remain cautious about paying excessive premiums and consider which segments of the green bond market align with their preferences and mandates.