The case for green bond premiums

Author: Danielle Myles | Published: 13 Nov 2014
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

KfW's Czichowski says investors should make financial concessions for green bonds
The treasurer of German development bank KfW has called on investors and intermediaries – including law firms – to accept lower yields and fees on green bonds.

He also said green funds must be invested in programmes under which the environmental impact can be quantified.

Frank Czichowski’s comments at an International Capital Market Association (ICMA) forum this week touch on two of the nascent market’s points of contention: premiums and impact reporting.

Green bonds are debt securities under which all funds flow into environmental and climate-related investments. Introduced by the World Bank in 2008, they have become increasingly popular with corporates over the past 12 months.

Many market participants, including SEB’s Christopher Flensborg who designed the first green bond, believe the instrument’s success depends on comparable pricing with ordinary bonds. But there is no consensus on the issue.

"I know I am entering very controversial territory, but investors should be prepared to accept a lower yield," Czichowski said.


  • Frank Czichowski, treasurer of German development bank KfW, has called on investors to pay a premium and law firms to charge lower fees for green bonds;
  • Speaking at the ICMA’s primary market forum, he said impact reporting is needed for the asset class to reach its full potential;
  • Czichowski said green bonds also represent an opportunity for the financial industry to improve its reputation, which remains tarnished

He acknowledged that asset managers would push back on this, citing their fiduciary responsibilities to earn the best return for their investors. But Czichowski stressed that growing investment in environmental protection measures would, in the long run, mean they are cheaper to develop and will generate better returns.

He echoed World Bank Group president Jin-Yong Cai’s statements earlier this year. In March he wrote that as the asset class develops and investors assess the long-term costs associated with a warmer climate, they may be willing to pay a higher price for green bonds.

The treasurer of the German development bank, however, went one step further noting that intermediaries could also play a role by lowering fees.

"Why not say that if bonds have a specific structure we are willing to support them either pro bono or with lower fees and in this way contribute to lower total yield on the security?" he asked. "If that were the case, if all three constituencies – investors, intermediaries and issuers – have a stake in this, I think there would be a conceptual discussion on how we could best achieve what we want to achieve."

Czichowski also suggested that impact reporting was essential for the market to reach its full potential. This constitutes reporting commitments imposed on the issuer regarding the environmental benefits to flow from the investment. It is often measured based on the reduced volume of carbon dioxide emissions stemming from the investments.

It’s a topic on which Czichowski is well qualified to speak. KfW is a pioneer in the area, with its €1.5 billion ($2 billion) green bond in July making it the first corporate to adopt these environmental-style key performance indicators.

"Investors should be prepared to accept a lower yield"

A growing number of investors are now refusing to invest in green deals that don’t include impact reporting. But it is an added expense, and whether it will become a pillar of green bond documentation is still uncertain.

In addition to their environmental and long-term economic benefits, Czichowski said green bonds present an opportunity to improve the financial industry’s tarnished reputation.

"The financial crisis and many different scandals have seriously undermined public perception and credibility of financial institutions," he said.

"The more we can demonstrate and communicate that we can provide solutions to the challenges of our societies at the world at large, the more we can contribute to the repairing of the rift between financial sector and rest of society."

The ICMA’s Green Bond Principles are available here.

See also

Green bonds’ growing pains

Green bonds report

Asia corporate green bond first to open market