Structural Loopholes in Sustainability-Linked Bonds

26 Pages Posted: 3 Jun 2022

Multiple version iconThere are 2 versions of this paper

Date Written: May 19, 2022


Sustainability-Linked Bonds (SLBs) – an innovative debt product that incorporates incentivized sustainability targets – are becoming increasingly popular to encourage issuers to improve their sustainability performance. However, existing SLB structures allow issuers to weaken the link between sustainability and financial outcomes, rendering SLBs less effective. This paper examines two potential structural loopholes on this front: late target dates and call options. Results show that SLBs with coupon step-up penalties, which constitute the majority and benefit most from such features, are more likely to have later target dates and call options embedded. Larger penalties are associated with greater likelihood of late target dates but not call options, which instead tend to be favored primarily by speculative grade issuers. The paper also provides evidence that issuers with high CO2 emissions are more likely to resort to such structural loopholes. These findings suggest that SLBs, despite incentivized targets, are prone to greenwashing.

Keywords: ESG, sustainability-linked bonds, greenwashing

JEL Classification: G15, G23, Q56

Suggested Citation

Ul Haq, Imtiaz and Doumbia, Djeneba, Structural Loopholes in Sustainability-Linked Bonds (May 19, 2022). Available at SSRN: or

Imtiaz Ul Haq (Contact Author)

World Bank Group ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

Djeneba Doumbia

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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