How to Derive a Bond Greenium Pathway from NGFS Scenarios

Climate scenario analysis is increasingly important as firms are required by regulation to report on climate risk. For example, TCFD disclosure using NGFS scenarios is currently an emerging standard for financial firms. Within this context, an important risk/ opportunities driver is the funding cost of a firm affected by transition risks. It is well observed and documented that green bonds exhibit a green premium, meaning they show a slightly lower yield compared to its corresponding non-green bond. Caramichael & Rapp (2022) estimated this greenium is on average 8bp globally. It is reasonable to expect future global funding for greening will primarily come from the private debt market. Thus, the greenium is a significant funding advantage for firms with green initiatives that could tap into the green bond/loan market. But how would the greenium change in the future? Using an idea in Baker et al. (2021), we model how the greenium pathway could evolve in the next decades under the six NGFS scenarios. Lastly, we discuss the narratives around the different modelled greenium pathways