The Pricing of Sustainability-Linked Bonds on the Primary and Secondary Bond Market
43 Pages Posted: 13 Jul 2023
Date Written: July 5, 2023
Abstract
Sustainability-Linked Bonds (SLBs) are a novel fixed income instrument linked to the achievement of predefined sustainability performance targets. The innovation of SLBs is a penalty mechanism – typically a coupon step-up – intended to incentivize the issuer to deliver on climate goals with real effort. By investigating the yield differentials between SLBs and conventional bonds of the same issuer this paper analyzes the impact of SLBs on issuers’ cost of capital and investor’s willingness to sacrifice return to hold sustainability-linked assets. The results imply a statistically significant albeit economically small premium both on the primary and on the secondary market. The premium is not constant over time and disappears in the second half of 2022.
Keywords: Sustainability-Linked Bonds, Green Premium, Sustainable Investing, Matching
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