The Skin-in-the-Game Bond: A Novel Sustainable Capital Instrument
25 Pages Posted: 23 Apr 2021
Date Written: April 2021
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: Suggested Citation