Structural Loopholes in Sustainability-Linked Bonds

Imtiaz Ul Haq and Djeneba Doumbia

No 10200, Policy Research Working Paper Series from The World Bank

Abstract: Sustainability-Linked Bonds—an innovative debt product that incorporates incentivized sustainability targets—are becoming increasingly popular to encourage issuers to improve their sustainability performance. However, existing Sustainability-Linked Bond structures allow issuers to weaken the link between sustainability and financial outcomes, rendering Sustainability-Linked Bonds less effective. This paper examines two potential structural loopholes on this front: late target dates and call options. The results show that Sustainability-Linked Bonds with coupon step-up penalties, which constitute the majority and benefit most from such features, are more likely to have later target dates and call options embedded. Larger penalties are associated with a greater likelihood of late target dates but not call options, which instead tend to be favored primarily by speculative grade issuers. The paper also provides evidence that issuers with high carbon dioxide emissions are more likely to resort to such structural loopholes. These findings suggest that Sustainability-Linked Bonds, despite incentivized targets, may be prone to greenwashing.

Date: 2022-10-06
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://documents.worldbank.org/curated/en/09923741 ... 33201d0b7057cedf.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:10200

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().