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Sustainability-Linked Debt and ESG-Linked 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 incentivizes managerial sustainability effort through ESG-linked executive compensation. We characterize when fixed-rate debt suffices and when sustainability-linked debt is necessary. The optimal contract depends on investors' investment structure, the borrower's ability to commit to ESG-linked compensation, and the project payoff in the success state. When ESG-linked compensation can be adjusted appropriately, fixed-rate debt can replicate sustainability-linked debt's incentive effects under some conditions, whereas explicit ESG-contingent payments are optimalunder others. Sustainability-linked debt and ESG-linked executive compensation are potentially substitutable incentive instruments.

Suggested Citation

  • Meg Adachi-Sato & Hiroshi Osano, 2026. "Sustainability-Linked Debt and ESG-Linked Executive Compensation," Discussion Paper Series DP2026-25, Research Institute for Economics & Business Administration, Kobe University, revised Sep 2026.
    • Handle: RePEc:kob:dpaper:dp2026-25
    as

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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2026-25.pdf
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    References listed on IDEAS

    as
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    Keywords

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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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