The Skin-in-the-Game Bond: A Novel Sustainable Capital Instrument

25 Pages Posted: 23 Apr 2021

See all articles by Katrien Antonio

Katrien Antonio

KU Leuven; University of Amsterdam

Jan De Spiegeleer

RiskConcile

Wim Schoutens

KU Leuven - Department of Mathematics

Eva Verschueren

KU Leuven - Department of Accounting, Finance and Insurance

Date Written: April 2021

Abstract

We introduce a novel sustainable capital instrument, with features inspired by CoCos: the skin-in-the-game bond. A skin-in-the-game bond is linked to the performance of a benchmark that relates to the broad concept of sustainability in at least one of its pillars: the environment, society or corporate governance. When the benchmark hits a preset trigger level, (part of) the bond's face value is withheld and directed into a government-controlled fund by the issuer. The skin-in-the-game bond offers a higher yield to investors than a standard corporate bond, in order to compensate for the risk of losing out on (part of) the investment. Both issuer and investor have skin-in-the-game; the embedded financial penalty incentivizes the preservation of a favorable benchmark value. In this work, we elaborate on the general concept of a skin-in-the-game bond, as well as on a tailored valuation model, illustrated by two examples: the ESG and nuclear skin-in-the-game bonds.

Keywords: contingent convertible bond, skin-in-the-game bond, sustainable finance, ESG, sustainable capital instrument

JEL Classification: C58, Q50

Suggested Citation

Antonio, Katrien and De Spiegeleer, Jan and Schoutens, Wim and Verschueren, Eva, The Skin-in-the-Game Bond: A Novel Sustainable Capital Instrument (April 2021). Available at SSRN: https://ssrn.com/abstract=3827001 or http://dx.doi.org/10.2139/ssrn.3827001

Katrien Antonio

KU Leuven ( email )

Leuven, Vlaams-Brabant

HOME PAGE: http://www.econ.kuleuven.be/katrien.antonio

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Jan De Spiegeleer

RiskConcile ( email )

Kapeldreef 60
Leuven, 3000
Belgium
492227143 (Phone)

HOME PAGE: http://www.riskconcile.com

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Eva Verschueren (Contact Author)

KU Leuven - Department of Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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