Sustainability-Linked Bonds: An investigation of premiums associated with sustainability-linked bonds
Abstract: Sustainable finance has become of great importance over the past years, especially due to global climate development, resulting in increased awareness among public and private sectors, and hence, more conscientious investors. In a market familiar with green bonds, Sustainability-Linked Bonds (SLBs) emerged as a new financial instrument posing a lesser greenwashing risk and, therefore, greater potential to make a material impact. This in turn is connected to the structure of SLBs, which encourages attainment of agreed upon Sustainability Performance Targets (SPTs) that are evaluated based on scientific key performance indicators (KPIs) with coupon penalties. Given the relevance and the urgency of SLB research, the aim of this study was to extend limited literature on SLBs by investigating the existence of what is known as sustainability premium among corporate SLB issuances within the European Union. In order to achieve this, a sample of SLBs was tightly matched with conventional bonds (CBs) based on factors such as issuer, maturity date, coupon, and size among others. A Wilcoxon signed-rank test was then conducted on the matched pairs, resulting in a statistically significant negative yield at issue difference between SLBs and CBs amounting to -53 bps with an average step-up coupon of 30.9, thus confirming the existence of a premium to investors. Furthermore, in order to account for robustness of an underlying assumption of such difference being caused by the sustainability dimension of SLBs, an OLS regression was performed. The output demonstrated that country of incorporation, sector, and SPT type were found to be significant factors, where respectively Austria, the consumer staples sector, and environmental SPTs were significant. However, since these factors do not represent differences between the matched bonds, the results of the Wilcoxon signed-rank test were proven to be robust. In addition, this paper presents potential explanations for substantial demand for SLBs, contribution to existing literature and practical implications, limitations as well as propositions for further research.
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