Publication | BRG

Corporate Bonds for Energy Companies Show Climate Premium

Matt Drews

April 29, 2021

Matt Drews writes about the urgency of the climate crisis in the finance community, climate premiums in the corporate bond market, and the future of energy project investment.

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As the urgency of the climate crisis has become more apparent to the finance community, much attention has been paid to the role that equity holders, bank financing, and specialty investment products play in determining the cost of capital for energy assets. Organizations like Climate Action 100+ have been using equity positions to pressure fossil fuel companies to reduce emissions, improve climate governance, and enhance disclosure around climate issues. Consumers, investors, and regulators have pressured banks, which provide most of the debt financing to energy assets, to cease lending to develop coal facilities, arctic oilfields, and other particularly carbon-intensive and environmentally sensitive assets; banks increasingly have charged higher loan spreads for more climate-damaging assets. And demand for green bonds finance climate solutions from fixed-income investors continues to outpace supply.

A climate premium also exists in the corporate bond market, with bonds for greener firms trading at higher prices and lower yields while bonds for less green firms trade at lower prices and higher yields. BRG professionals have found that among major US power generation owners, browner companies had 0.7 percent to 1.5 percent higher bond yields than greener companies from 2017 to 2020, adjusted for bond duration and credit rating. Similarly, bond yields for non-supermajor oil and gas upstream companies (excluding the power companies above) were 1.4 percent to 2.3 percent higher than they were for renewable companies from 2017 to 2020, though the effect was notably smaller for supermajors. While receiving less media attention than investor activism and pledges by banks to cease financing fossil assets, the corporate bond market also increasingly appears to be diverting capital toward companies more aligned with the energy transition through a lower cost of capital. This is significant, as the corporate bond market remains a major source of debt financing for energy facilities (the OECD estimates that from 2009 to 2019, USD$167 billion corporate bonds were issued by energy companies in advanced economies and a further USD$78 billion were issued in emerging economies), though for now most of that funding still goes toward traditional companies.