Sustainability-linked bonds, corporate commitment and the cost of debt

Sustainability-linked bonds represent one of the newest weapons of choice for firms raising money to reach their sustainability targets. On a sample of 252 corporate sustainability-linked bonds, we employ cross-sectional regressions to inspect the impact of a combination of factors on the cost of debt financing for the issuer, proxied by the yield at issuance. The results unveil that firms with higher step-up clauses in their sustainability-linked bonds do not benefit from reduced debt costs. In contrast, firms exhibit a lower cost of debt when the coupon step-up-related cash flows are paid for a longer period in case of corporate sustainability target failure. On a different note, market actors critically eye the ambitiousness of the targets, with companies experiencing higher yields at issuance when issuing sustainability-linked bonds with outdated sustainability benchmarks and easy-to-reach targets. This study is among the first to underscore the importance of the interplay between financial and qualitative factors in properly designing sustainability-linked bonds with financially material, ambitious, and time-sensitive sustainability targets to reduce the cost of debt financing.