Bonds with Benefits: An Empirical Investigation of Sustainability-Linked Bonds

Abstract: Sustainability-linked bonds (SLBs) are the youngest and fastest-growing instrument of the sustainable debt market, with unique properties that should incentivise companies to become more sustainable. Yet there is little empirical evidence on SLBs. This thesis investigates three potential rationales for issuing SLBs: to obtain a lower cost of capital, to signal dedication to sustainability, and to commit to sustainability targets. First, using a matching method, we find that SLBs are issued at a yield discount compared to conventional bonds. Second, using an event study, we find that the stock market reacts positively to the announcement of SLB issuances and the reaction is stronger for first-time issuers. Third, by investigating SLB contracts, we find that the financial penalties for failing to achieve the sustainability performance targets are small. Our results suggest that companies may issue SLBs to obtain a lower cost of capital and to signal dedication to sustainability. However, it is unclear whether companies issue SLBs to commit to sustainability targets.