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

47 Pages Posted: 9 Feb 2022

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 Banking and Finance

Date Written: January 12, 2022

Abstract

We examine the novel phenomenon of sustainability-linked bonds (SLBs). These bonds’ coupon is linked to the issuer achieving a predetermined sustainability performance target. We estimate the yield differential between SLBs and non-sustainable counterfactuals by matching bonds from the same issuer. Our results show that in most cases investors pay for the improvement in sustainability, while issuers benefit from a sustainability premium. Our analysis suggests that the sustainability premium is larger for bonds with a higher coupon step-up and for callable bonds. We also show that there is a ‘free lunch’ for some SLB issuers, as their financial savings are higher than the potential penalty, and they have a call option to reduce this penalty. While our findings suggest that most SLBs incentivize sustainability improvements by offering a lower cost of capital, some companies that do not benefit from a sustainability premium seem to issue SLBs to signal their commitment to sustainability targets. The ‘free lunch’ however suggests that SLBs can also be a form of greenwashing, when they are issued purely for financial optimization without a real commitment to carry out sustainability improvements.

Keywords: Sustainable investing, ESG, sustainability-linked bonds, impact, greenwashing

Suggested Citation

Kölbel, Julian and Lambillon, Adrien-Paul, Who Pays for Sustainability? An Analysis of Sustainability-Linked Bonds (January 12, 2022). 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 Banking and Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

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

Paper statistics

Downloads
3,179
Abstract Views
7,786
rank
5,666
PlumX Metrics