What shapes greenium in bond markets? Evidence from Japan

In this study, we investigate whether green bonds are issued at lower yield spreads compared to conventional bonds—a phenomenon referred to as the “greenium”. Despite years of research, the existence of a greenium remains inconclusive. To contribute to this ongoing debate, we analyse data from Japan’s primary corporate bond market between 2016 and 2023, employing multivariate regression models to assess yield differentials at issuance. We find that the greenium is not universal; it appears only for firms with strong environmental performance, with yield spreads that are 7 to 17 basis points lower on average. However, the greenium disappears after 2021, coinciding with rising greenwashing concerns and widening global yield spreads. While demand for green bonds appears to matter for the greenium, the post-liquidity difference has little impact. These findings indicate that sustainability performance can influence capital costs, and that credibility and transparency play key roles in maintaining investor trust in green finance. • We show that premium for green bonds exists selectively, primarily for firms with strong sustainability performance. • Greenium is also evident among financial institutions and first-time green bond issuers. • The greenium disappears after 2021, likely due to rising greenwashing concerns and broader yield spread volatility. • While investor demand appears to influence greenium, post-issuance liquidity has a limited effect. • Our findings highlight the need for better sustainability disclosures to reduce information asymmetry and sustain green bond benefits.