Who Pays for Sustainability? An Analysis of Sustainability-Linked Bonds

35 Pages Posted: 9 Feb 2022 Last revised: 8 Feb 2023

See all articles by Julian F Kölbel

Julian F Kölbel

University of St. Gallen - School of Finance; MIT Sloan; Swiss Finance Institute

Adrien-Paul Lambillon

University of Zurich - Department of Finance

Date Written: January 12, 2022

Abstract

We examine the novel phenomenon of sustainability-linked bonds (SLBs). These bonds’ coupon is contingent on the issuer achieving a predetermined sustainability performance target. We estimate the yield differential between SLBs and non-sustainable counter-factuals by matching bonds from the same issuer. Our results suggest that issuing an SLB yields an average premium of -9 basis points on the yield at issue compared to a conventional bond, although this premium decreased over time. On average, the savings from this reduction in the cost of debt exceed the maximum potential penalty that issuers need to pay in case of failure of the sustainability performance target. This suggests that SLB issuers can benefit from a ’free lunch’, i.e. a financial benefit despite not reaching the target. Investigating the drivers of the premium, we show that there is no clear empirical relationship between the yield at issue and the coupon step-up agreement of SLBs. Instead, an issuer’s first SLB seems to command a significantly larger premium, suggesting that especially the first SLB is seen by investors as a credible signal of a company’s commitment to sustainability.

Keywords: Sustainable investing, ESG, sustainability-linked bonds, corporate bonds, cost of debt

Suggested Citation

Kölbel, Julian and Lambillon, Adrien-Paul, Who Pays for Sustainability? An Analysis of Sustainability-Linked Bonds (January 12, 2022). Swiss Finance Institute Research Paper No. 23-07, Available at SSRN: https://ssrn.com/abstract=4007629 or http://dx.doi.org/10.2139/ssrn.4007629

Julian Kölbel (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St. Gallen, 9000
Switzerland

MIT Sloan ( email )

100 Main Street
Cambridge, MA 02142
United States

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Adrien-Paul Lambillon

University of Zurich - Department of Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

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