(Bloomberg) -- The pricing advantage Denmark gets for selling green bonds is set to fall sharply this year, reflecting reduced appetite among foreign and domestic investors for ethical debt.

Analysts see a so-called greenium of two basis points or less for Denmark’s second green bond, down from the five basis points its debut fetched in an auction in January 2022. The country held an investor call Monday ahead of a syndication for the 10-year offering.

Denmark is a good bellwether for the state of the market, since it twins its AAA-rated green securities with a conventional bond of the same maturity, making direct comparisons possible. While global green bond issuance is doing well at over $400 billion this year, the sector is no longer such a good bet to get cheaper borrowing costs.

“The willingness among investors to pay more for green bonds has diminished globally,” said Jan Storup Nielsen, chief analyst at Nordea Bank Abp.

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Denmark is opting for a syndicated green offering this time around to get a wider audience. Foreigners only made up around 15% of bondholders of the first one by the end of July, lower than normal, said Simon Hajaj Ruby Harmat, principal treasury manager at the Danish central bank, on an investor call Monday.

The inaugural auction drew five times the orders, mostly from domestic insurance and pension companies. But appetite has since dampened and the spread to its conventional twin has narrowed to around 2 basis points, according to data compiled by Bloomberg.

The fact Denmark is now focusing on attracting foreign investors “may be a sign that domestic investors are not particularly interested,” being already heavily invested in the first green bond, said Henrik Hansen, chief analyst at Sydbank A/S.

While it will be “interesting” to follow the development of the greenium, it is unlikely to directly influence the government’s desire to issue green bonds, Christian Kettel Thomsen, governor of the Danish central bank, said in an interview on Wednesday. Funding cost advantages can be one driving force for issuing green debt, “but not the only one,” he said. “Green bonds are definitely here to stay. There is an interest in them and a need.”

Denmark is targeting total green bond sales of up to 10 billion kroner ($1.4 billion) in 2023 to fund investments in rail infrastructure, tax exemptions for low-emission vehicles and subsidy programs that encourage the transition to renewable power. 

--With assistance from Greg Ritchie.

(Updates with comments from central bank governor in eighth paragraph.)

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