Do sustainability-linked bonds reward greater sustainability by design?
Year: 2026
Type: article
Abstract: Sustainability-linked bonds (SLBs) are a new financial instrument designed to create incentives for sustainable behavior on the part of the issuing companies or institutions. SLBs feature increased coupon payments if key performance indicators do not reach sustainability performance targets. In a standard pricing framework, we find that fair issue yields of SLBs, and hence their financing costs, are non-monotonic in the planned sustainability performance and the ambition of the sustainability targets. As a result, issuers that commit themselves to greater sustainability are not always rewarded through a lower issue yield, and increasing the ambition of the sustainability target has ambiguous effects. The rewards that the SLB offers over its lifetime through a reduction of penalty payments are also non-monotonic. They tend to go to zero if the target is made very ambitious. • Sustainability-linked bonds are intended to reward sustainable behavior. • Issue yields and expected penalty-payment rewards can be non-monotonic. • Greater sustainability or more ambitious targets do not necessarily lower financing costs. • Strategic issuers may sometimes benefit from weaker sustainability performance or target choices. • SLB design frameworks should complement ambition with incentive strength and robustness.
Source: Energy Economics
Authors: An Chen, Maria Hinken, Gunter Löffler
Institution: Universität Ulm
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $4,280
OpenAlex ID: W7160699725