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Pricing of sustainability-linked bonds

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  • Feldhütter, Peter
  • Halskov, Kristoffer
  • Krebbers, Arthur

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.

Suggested Citation

  • Feldhütter, Peter & Halskov, Kristoffer & Krebbers, Arthur, 2024. "Pricing of sustainability-linked bonds," Journal of Financial Economics, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:jfinec:v:162:y:2024:i:c:s0304405x24001673
    DOI: 10.1016/j.jfineco.2024.103944
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    1. Meg Adachi-Sato, 2025. "Power of Values-based Investors on ESG Actions of Value-orientated Managers," Discussion Paper Series DP2025-01, Research Institute for Economics & Business Administration, Kobe University.
    2. Mariani, Massimo & D’Ercole, Francesco & Frascati, Domenico & Fraccalvieri, Giuseppe, 2025. "Sustainability-linked bonds, corporate commitment and the cost of debt," Research in International Business and Finance, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    ESG; Sustainability-linked bond; Corporate bonds; Step-up coupon; Sustainium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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