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Sustainability-Linked Debt and ESG Executive Compensation

Author

Listed:
  • Meg Adachi-Sato

    (Research Institute for Economics and Business Administration, Kobe University, JAPAN and Faculty of Business Administration / Institute of Small Business Research and Business Administration, Osaka University of Economics, JAPAN)

  • Hiroshi Osano

    (College of Business Administration, Ritsumeikan University, JAPAN)

Abstract

We study the optimal design of sustainable debt when a for-profit borrower raises capital from socially responsible investors and motivates a for-profit manager to exert sustainability effort through an executive compensation contract. We ask when fixed-rate bonds or loans are sufficient and when sustainability-linked debt is required, given that executive compensation can also be tied to ESG performance. The analysis shows that the optimal debt contract depends jointly on the investment structure faced by socially responsible investors and the borrower's ability to commit to ESG-linked managerial compensation. When the borrower can adjust ESG-based compensation appropriately, noncontingent debt can replicate the incentive effects of sustainability-linked debt in some environments, whereas explicit sustainability-linked payments remain valuable in others. The results clarify how sustainable debt and ESG-linked executive pay interact as alternative incentive instruments and provide implications for the design of sustainable bonds and loans.

Suggested Citation

  • Meg Adachi-Sato & Hiroshi Osano, 2026. "Sustainability-Linked Debt and ESG Executive Compensation," Discussion Paper Series DP2026-25, Research Institute for Economics & Business Administration, Kobe University.
    • Handle: RePEc:kob:dpaper:dp2026-25
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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2026-25.pdf
    File Function: First version, 2026
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    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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