The Economics of Sustainability-Linked Bonds

Abstract

The Economics of Sustainability Linked Bonds Finance Working Paper N° 820/2022 September 2022 Tony Berrada University of Geneva Leonie Engelhardt University of Geneva Rajna Gibson University of Geneva, GFRI, and ECGI Philipp Krueger University of Geneva, GFRI, SFI and ECGI © Tony Berrada, Leonie Engelhardt, Rajna Gibson and Philipp Krueger 2022. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. This paper can be downloaded without charge from: http://ssrn.com/abstract_id=4059299 www.ecgi.global/content/working-papers ECGI Working Paper Series in Finance The Economics of Sustainability Linked Bonds Working Paper N° 820/2022 September 2022 Tony Berrada Leonie Engelhardt Rajna Gibson Philipp Krueger © Tony Berrada, Leonie Engelhardt, Rajna Gibson and Philipp Krueger 2022. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Abstract We develop a framework to understand the incentive structure and pricing of sustainability-linked bonds (SLBs). It provides conditions under which SLBs are incentive compatible for firms. We propose a novel mispricing measure for SLBs. Using the model and mispricing measure, we derive and test several empirical predictions. We show that overpriced SLBs experience negative returns …

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