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Do sustainability-linked bonds reward greater sustainability by design?

Author

Listed:
  • Chen, An
  • Hinken, Maria
  • Löffler, Gunter

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.

Suggested Citation

  • Chen, An & Hinken, Maria & Löffler, Gunter, 2026. "Do sustainability-linked bonds reward greater sustainability by design?," Energy Economics, Elsevier, vol. 159(C).
    • Handle: RePEc:eee:eneeco:v:159:y:2026:i:c:s0140988326002616
    DOI: 10.1016/j.eneco.2026.109382
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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