Sustainability-Linked Bonds An Examination of Yield Differences Between Sustainability-Linked and Conventional Bonds

Abstract

This thesis explores sustainability-linked bonds (SLBs), a financial instrument that directly link coupon payments to a predefined sustainability performance target, resulting in a potential penalty if the target is not met. This thesis explores the existence, magnitude and determinants of sustainability premium. Furthermore, we examine the determinants of the yield differential between by matching bonds from the same issuer. Finally, we investigate the effect of the callable feature on the yield differential between SLBs and their counterfactuals. We find a positive sustainability premium of 22.71 basis points, which challenges previous research. We find that callable SLBs on average have a higher yield differential than at-maturity bond pairs, implying a penalty for issuers of callable SLBs. The thesis provides a comprehensive overview of the rapid growing SLB marked, highlighting key features.