University of St. Gallen
Who Pays for Sustainability? An Analysis of Sustainability-Linked Bonds
October 31, 2022 – 05:15 – 06:30 PM (CET)
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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.
The corresponding paper can be found here.
Dr. Julian Kölbel is assistant professor of sustainable financeat the Center for financial services innovation at the University of St. Gallen. He is also a research affiliate at MIT Sloan, where he is a co-founder of the Aggregate Confusion Project. His research covers the real-world impact of sustainable investing, analysis of environmental, social and governance (ESG) metrics, and investor preferences for sustainability. Julian has studied at ETH Zurich, the University of Oxford, and has worked as a Post-Doc at MIT Sloan. Professionally, he has worked at Bank Vontobel, RepRisk AG, and is currently a member of the investment committee at the Swiss pension fund Abendrot.
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