Finsif tukee vuosittain vastuullisen sijoittamisen tutkimusta stipendein
Finsif jakaa stipendejä vastuullisesta sijoittamisesta kiinnostuneille opiskelijoille ja tutkijoille. Stipendien jaon tarkoituksena on edistää vastuullisen sijoittamisen tutkimustyötä. Stipendejä jaetaan vuosittain enintään 8000 euron summalla. Vuoden 2024 stipendihaku alkaa keväällä. Lisätietoa
Sustainability-linked bonds – a novel frontier in sustainable debt securities
Sustainability-linked bonds (”SLBs”) are a novel addition to the growing pool of different types of sustainable debt securities. SLBs complement other sustainable debt securities such as use-of-proceeds bonds by allowing flexibility as raised funds are not earmarked but can rather be freely used for general corporate purposes. During recent years, the SLB market has grown fast from only one issuance of $0.2bn in 2018 to over $220bn by the end of 2022.
Despite flexibility around design, most SLBs are structured to link the bond coupons to targets around specific sustainability KPIs in a way that, in case an issuer fails to reach a set target by a predefined observation date, the bond experiences a coupon step-up (usually 25 bps). In theory, the structure should incentivize SLB issuers to pursue sustainable developments as they stand to gain financial benefits from reaching their quantitatively measurable and verifiable targets.
To tackle SLBs’ weak disclosure, fast market growth and media remarks of unambitious and irrelevant SLB designs, the International Capital Markets Association rather quickly ended up publishing Sustainability-Linked Bond Principles that have since become the market standard used as a benchmark in discretionary second-party opinions (”SPOs”). The SPOs’ purpose is to reduce information asymmetries and uncertainties between the SLB issuers and prospective investors by verifying a given SLB design’s uniformity with the principles.
Financial savings through green promises
Prior to my master’s thesis, financial incentives were the only motivation category empirically studied and identified to possibly incentivize SLB issuances on average in a working paper with no empirical literature addressing decisions regarding SPOs. Since obtaining an SPO for an SLB costs issuers both time and money and might expose their security designs’ possible weaknesses while not being a regulatory requirement like for example an audit, the issuers likely stand to gain something from investing in one and as such, I expand on the prior literature by observing whether the same motives can also incentivize decisions to obtain SPOs.
By matching SLBs with as similar as possible conventional bonds issued by the same company and controlling for a wide set of variables, I show the presence of an SPO to indeed predict greater differences in yields at issue between the two bond types on average. The finding suggests credit market to consider the additional assurance provided by the presence of an SPO to be valuable by accepting a lower yield in exchange for investing in such securities. Conservative estimates for the yield difference the presence of an SPO can predict range from 28 bps to 50 bps, which is not only statistically significant but also economically a very significant savings potential.
Groundless sustainability promises to be wary of
To study whether SLB issuances or decisions to obtain SPOs serve as credible ways of signaling sustainability commitments to the market, I create another matched sample by matching SLB issuers with as similar as possible conventional bond issuers. I also show SLB issuers’ sustainability performance to, in fact, deteriorate broadly in different sustainability metrics following the issuances compared to the conventional bond issuers, regardless of whether an SPO is present or not. When taken together with the identified possible financial savings, these findings raise serious greenwashing concerns over issuers’ incentives in the SLB market.
Aside from the key contributions discussed here, my thesis makes several other novel contributions to the almost non-existent literature about incentives in play in the SLB market and paints an overall gloomy picture of SLBs and their SPOs being an easy trick for the issuers to tap into lower cost of capital by making unsubstantiated sustainability promises. Understanding these dynamics and issuer incentives is extremely relevant for numerous different stakeholders assessing, not only the SLBs in the credit market, but also the positioning of the issuing firms in the equity markets.
Antti Jalonen
M.Sc. (Econ.), Finance, Aalto University
The study can be found here.
