Valuation and Design of Sustainability-Linked Bonds

40 Pages Posted: 20 Dec 2023

See all articles by An Chen

An Chen

Ulm University - Institute of Insurance Science

Maria Hinken

Ulm University - Institute of Insurance Science

Gunter Löffler

Ulm University

Date Written: December 7, 2023

Abstract

Sustainability-linked bonds (SLBs) offer coupon payments that increase if key performance indicators do not reach sustainability performance targets. Using risk-neutral pricing, we find that issue yields of SLBs, and hence their financing costs, are non-monotonic in the ambition of the sustainability targets. Contrary to common perceptions, more ambitious targets do not necessarily indicate a higher sustainability quality; rather, the issuer may set more ambitious targets in order to lower financing costs. We also show that an issuer that chooses higher penalty payments may do so in order to better exploit investor preferences for sustainable assets.

Keywords: sustainability, bonds, security design, coupon step-up, default

JEL Classification: G12, G32, Q54, Q56

Suggested Citation

Chen, An and Hinken, Maria and Löffler, Gunter, Valuation and Design of Sustainability-Linked Bonds (December 7, 2023). Available at SSRN: https://ssrn.com/abstract=4657071 or http://dx.doi.org/10.2139/ssrn.4657071

An Chen

Ulm University - Institute of Insurance Science ( email )

Ulm, 89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Maria Hinken (Contact Author)

Ulm University - Institute of Insurance Science ( email )

Ulm, 89081
Germany

Gunter Löffler

Ulm University ( email )

Helmholzstrasse
Ulm, D-89081
Germany
+49 731 50 23598 (Phone)
+49 731 50 23950 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
103
Abstract Views
308
Rank
482,746
PlumX Metrics