Pricing of sustainability-linked bonds

Peter Feldhütter; Kristoffer Halskov; Arthur Krebbers

doi:10.1016/j.jfineco.2024.103944

Pricing of sustainability-linked bonds

Peter Feldhütter^*, Kristoffer Halskov, Arthur Krebbers

^*Corresponding author for this work

Accounting And Finance

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Abstract

We examine the pricing of sustainability-linked bonds (SLBs), where the cash flows depend on the bond issuer achieving one or more Environmental, Social and Governance (ESG) goals. Investors are willing to accept a 1–2bps lower yield due to the bond’s ESG label, providing evidence of investors caring about environmental impact. Furthermore, we find the average probability of missing the target is 14%–39% so firms set ESG targets that are easy to reach. We find that the SLB market is efficient: the prices of SLBs depend strongly on the size of the potential penalty and there is no evidence of mispricing. Finally, our results suggest that SLBs serve as financial hedges against ESG risk.

Original language	English
Article number	103944
Journal	Journal of Financial Economics
Volume	162
Early online date	12 Sept 2024
DOIs	https://doi.org/10.1016/j.jfineco.2024.103944
Publication status	Published - Dec 2024

Keywords

ESG
Sustainability-linked bond
Corporate bonds
Step-up coupon
Sustainium

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title = "Pricing of sustainability-linked bonds",

abstract = "We examine the pricing of sustainability-linked bonds (SLBs), where the cash flows depend on the bond issuer achieving one or more Environmental, Social and Governance (ESG) goals. Investors are willing to accept a 1–2bps lower yield due to the bond{\textquoteright}s ESG label, providing evidence of investors caring about environmental impact. Furthermore, we find the average probability of missing the target is 14%–39% so firms set ESG targets that are easy to reach. We find that the SLB market is efficient: the prices of SLBs depend strongly on the size of the potential penalty and there is no evidence of mispricing. Finally, our results suggest that SLBs serve as financial hedges against ESG risk.",

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doi = "10.1016/j.jfineco.2024.103944",

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volume = "162",

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T1 - Pricing of sustainability-linked bonds

AU - Feldhütter, Peter

AU - Halskov, Kristoffer

AU - Krebbers, Arthur

PY - 2024/12

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N2 - We examine the pricing of sustainability-linked bonds (SLBs), where the cash flows depend on the bond issuer achieving one or more Environmental, Social and Governance (ESG) goals. Investors are willing to accept a 1–2bps lower yield due to the bond’s ESG label, providing evidence of investors caring about environmental impact. Furthermore, we find the average probability of missing the target is 14%–39% so firms set ESG targets that are easy to reach. We find that the SLB market is efficient: the prices of SLBs depend strongly on the size of the potential penalty and there is no evidence of mispricing. Finally, our results suggest that SLBs serve as financial hedges against ESG risk.

AB - We examine the pricing of sustainability-linked bonds (SLBs), where the cash flows depend on the bond issuer achieving one or more Environmental, Social and Governance (ESG) goals. Investors are willing to accept a 1–2bps lower yield due to the bond’s ESG label, providing evidence of investors caring about environmental impact. Furthermore, we find the average probability of missing the target is 14%–39% so firms set ESG targets that are easy to reach. We find that the SLB market is efficient: the prices of SLBs depend strongly on the size of the potential penalty and there is no evidence of mispricing. Finally, our results suggest that SLBs serve as financial hedges against ESG risk.

KW - ESG

KW - Sustainability-linked bond

KW - Corporate bonds

KW - Step-up coupon

KW - Sustainium

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DO - 10.1016/j.jfineco.2024.103944

M3 - Article

SN - 0304-405X

VL - 162

JO - Journal of Financial Economics

JF - Journal of Financial Economics

M1 - 103944

ER -

Pricing of sustainability-linked bonds

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