Finding a ‘Free Lunch’ in Sustainability-Linked Bond Markets

Many issuers of sustainability-linked bonds see an issuance premium that exceeds the penalty for missing sustainability key performance indicators (KPIs)Rapid growth of issuance shows appeal of more flexibly labeled bonds, but the market needs to address some structural weaknesses to continue to growMore transparency on KPI target setting, alignment with Net Zero pathways, and adjustment of incentive structures would strengthen the market’s foundations

One of the enduring maxims in economics is that there is no such thing as a free lunch. However, the rapid growth of sustainability-linked bonds from the first issues at the end of 2018 to more than USD 120 billion of issuance in 2021, highlights a powerful draw for a relatively new type of labeled bond.

New researc...