The pricing of sustainability-linked bonds on the primary and secondary bond markets

Poggensee, Jannis Article — Published Version The pricing of sustainability-linked bonds on the primary and secondary bond markets Journal of Asset Management Provided in Cooperation with: Springer Nature Suggested Citation: Poggensee, Jannis (2025) : The pricing of sustainability-linked bonds on the primary and secondary bond markets, Journal of Asset Management, ISSN 1479-179X, Palgrave Macmillan UK, London, Vol. 26, Iss. 4, pp. 411-431, https://doi.org/10.1057/s41260-024-00390-z This Version is available at: https://hdl.handle.net/10419/323680 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ ORIGINAL ARTICLE The pricing of sustainability-linked bonds on the primary and secondary bond markets Jannis Poggensee 1 Revised: 13 November 2024 / Accepted: 17 November 2024 / Published online: 4 February 2025 ÓThe Author(s) 2025 Abstract This paper investigates the yield differentials between sustainability-linked bonds (SLBs)—a novel fixed income instrument whose coupon payments are linked to the achievement of predefined sustainable performance targets—and conventional bonds issued by the same company, both on the primary and secondary bond markets. By fitting yield curves with the Nelson–Siegel Svensson method on the SLB’s pricing day and applying panel regressions to examine yield differentials thereafter, the study assesses whether SLBs trade at a premium, indicating higher prices and consequently lower yields. Fixed-effects panel regression is utilized to isolate the unobserved time-invariant yield differential between SLBs and a matched synthetic conventional bond with the same residual maturity. The results show a statistically significant but economically small premium for SLBs in both the primary and secondary market. The sustainability premium is not significantly driven by the SLB’s penalty structure and fluctuates over time. This research contributes to the literature by applying a novel methodological framework to examine the evolving nature of SLB premiums and their implications for both issuers and investors. Keywords Sustainable finance Green premium Bond pricing Sustainability-linked bonds Socially responsible investing Introduction Climate change is one of the most challenging issues of our time. Through physical risks, which cover environmental disasters and transitory risks, which are business-related risks that evolve due to societal and economical shifts toward a low-carbon future, climate change poses a risk to the economy and the financial system. This pushes for a fundamental conversion toward more sustainable production and consumption processes that require substantial investments. Asset markets will play a key role in financing the green transition and directing cash flows to companies with the best strategies and efforts to combat climate change and its consequences. Consequently, new financing instruments emerged in debt markets in recent years. After the first emission by the European Investment Bank (EIB) in 2007, the growth of green bonds soared, and this trend is likely to hold in the future (Flammer 2021). Moreover, additional types of sustainable debt in terms of social and sustainable bonds (GSS; green, social and sustainable bonds in the following) have been issued until today. In 2022, GSS bonds had an issuance volume of 795 billion USD according to Refinitiv’s ESG Bond Guide Database. Reflecting the growing importance of ESG-related debt, the academic literature started focusing on the pricing of green bonds, particularly the extent to which green bonds trade at a premium—which is referred to as ‘‘greenium’’ where prices of green assets are higher (and consequently yields lower) compared to conventional bonds. Evidence in this field in favor of green premiums—‘‘greenium’’—has been mixed so far (e.g., Kapraun et al. 2021). Although the increased transparency and acceptance of GSS bonds might lead to lower bond yields on the primary and on the secondary market, the lack of a uniform definition of eligible &Jannis Poggensee [email protected] 1 QBER - Institut fu ¨r Quantitative Betriebsund Volkswirtschaftliche Forschung, Christian-AlbrechtsUniversita ¨t zu Kiel, Olshausenstraße 40, 24098 Kiel, Germany Journal of Asset Management (2025) 26:411–431 https://doi.org/10.1057/s41260-024-00390-z projects would dampen the credibility of the market leaving its net effect on bond returns unclear (Bundesbank 2019). Besides, particularly green bonds sometimes lack the criterion of ‘‘additionality,’’ because they refinance existing projects and assets but not representing an innovative beyond ‘‘business as usual’’ trajectory to reduce greenhouse gas (GHG) emissions (Maino 2022). Finally, green bonds taxonomies do not extensively include some ‘‘hard-to-abate’’ sectors like energy or manufacturing which, however, have high debt capital requirements to prefinance the sustainable conversion of the production process. In response to these limitations, sustainability-linked bonds, SLBs in the following, have emerged as novel and alternative fixed income instrument offering a different approach to sustainable finance. Unlike GSS bonds, which restrict financing to specific environmentally beneficial projects (e.g., renewable energy, energy efficiency or pollution prevention), 1 SLBs offer issuers the flexibility to finance general-purpose initiatives while committing to measurable sustainability targets. Those targets, which can relate to environmental, social or governance outcomes, create financial incentives for issuers to meet predefined sustainability goals. Nonachievement of those targets leads to varying financial characteristics, most commonly a coupon step-up (ICMA 2020). This makes SLBs particularly attractive for companies aiming to integrate sustainability across their operations, while providing investors with a framework that holds issuers accountable. Given the maturity of the green bond market and the mixed evidence regarding the existence of a ‘‘greenium,’’ the shift to investigating SLBs is essential. Their flexible approach requires empirical examination to understand how financial markets price SLBs compared to conventional bonds. The International Capital Market Association (ICMA), which serves as the secretariat to the SLB-principles, made two key provisions for how SLBs can address the critics green bonds are confronted with (Vulturius et al. 2022). First, SLBs are intended to finance general-purpose projects that have company-wide sustainability objectives, prioritized by the sustainable target a company selects. In particular, sustainability performance targets (SPT) should be beyond a ‘‘business as usual’’ trajectory, related to science-based scenarios (like the Science-Based Target Initiative, SBTi) or policy targets (Paris Agreement). Past performance of the issuer against a Key Performance Indicator should be reported over a period of at least three years in addition to the relevance and positioning of the sustainable performance target against industry peers. Secondly, the novel SLB-penalization scheme should incentivize the issuer’s effort to reach its targets and signal investors that the issuer credibly attempts to dampen the negative consequences arising from climate change. 2 Despite their potential, recent industry reports stress growing investor skepticism toward SLBs. 3 Some are accused of greenwashing, might it be due to unambitious sustainable performance targets or a coupon step-up being not punitive enough. For instance, Tesco’s SLB, linked to the reduction of greenhouse gas emissions, only covers 2% of its total emissions. US-based Level 3 Communication’s $900 million SLB maturing in 2029 can be redeemed by the investor in January 2024 before any penalty of not achieving the sustainability targets kicks in. Altogether, such loopholes undermine the credibility of the market and weaken investor confidence. Considering these challenges and given the flexibility and potential of SLBs to incentivize company-wide sustainability, this paper aims to investigate how SLBs are priced in comparison with conventional bonds. It is assessed whether SLBs exhibit a sustainability premium— like green bond’s ‘‘greenium’’—and how SLB-specific features like the penalty scheme might affect the premium. The paper aims to fill a significant research gap by providing a comprehensive analysis of SLB-pricing behavior in both primary and secondary markets. Understanding the pricing dynamic of SLBs is critical for both issuers that have a high need for financing due to the requirements of the green transformation to a low-emission economy and therefore seek to optimize financing cost, and investors, who aim to balance the financing of firms with a credible commitment toward combating climate change with returns. To the best of my knowledge, no other study has systemically compared SLB yields to conventional bonds from the same issuer across both the primary and secondary markets. This study also contributes to the broader discussion of whether sustainable assets, such as SLBs, exhibit a premium (i.e., trade at higher prices and lower yields) due to investors’ taste for such assets, which may benefit issuers by lowering cost of debt (i.e., Zerbib 2019; Bachelet et al. 2019; Hachenberg and Schiereck 2018). Additionally, this study adds to the discussion about determinants of yield differentials between sustainable and conventional assets (Bachelet et al. 2019; Kapraun et al. 1 For an overview of eligible projects, see the green bond principles of the ICMA https://www.icmagroup.org/assets/documents/Sustain able-finance/2022-updates/Green-Bond-Principles_June-2022280622.pdf 2 Particularly by setting ambitious and science-based performance targets, setting sufficiently high penalties and issuing SLBs with no embedded call options to minimize the period in which the coupon step-up has to be paid issuers foster the credibility of SLBs. 3 https://www.environmental-finance.com/content/analysis/slbs-atinflection-point-in-2023-as-sustainable-bond-market-rebounds.html 412 J. Poggensee 2021; Larcker and Watts 2020) and which SLB features might affect the pricing differentials in the cross section (Ko ¨lbel and Lambillon 2022; Erlandsson and Mielnik 2022). Finally, the study is particularly timely given the rise in greenwashing concerns in the SLB market. Several contributions (Liberatore2021; Haq and Doumbia 2022; Reznick et al. 2022) blame SLBs being embedded with weak penalty structures, sustainability targets that are too easy to achieve or early call options so that the SLB can be redeemed before the penalty mechanism materializes. To date, Ko ¨lbel and Lambillon (2022) offer the most comprehensive study of SLBs; however, their research is limited to yield comparisons at the issuance stage (primary market). This paper goes further by extending the analysis to both primary and secondary markets. Theoretically, the analysis is based on Pedersen et al. (2021) and Pastor et al. (2021) developing ESG-adjusted asset pricing models and contributes to the debate whether investor derives utility from sustainable investments and hence would be willing to pay higher security prices, i.e., accept lower returns. Given the flexibility and potential of SLBs to incentivize company-wide sustainability, expanding the literature to SLBs is crucial for practical implications in sustainable finance. This raises important questions in terms of how SLBs are priced and how SLB-specific features such as the penalty structure might impact the premium, further justifying the need for empirical research. First, a primary market analysis is applied by fitting yield curves with the Nelson–Siegel–Svensson method (NSS) to construct yield curves for conventional bonds issued by the same company. Afterward, the SLB yield is overlaid, to examine whether the SLB priced below (would imply a sustainability premium) in line or above (would imply that SLBs trade at higher yields and carry higher cost of debt for the issuer) its yield curve. Moreover, the SLB pricing in the secondary is investigated by applying a fixedeffects panel regressions which compares the yields of SLBs and a matched synthetic bond to investigate whether a potential sustainability premium would persist on the secondary market. Finally, the features that may drive yield differentials between the two bond types are examined. The results provide several empirical findings. First, I provide an overview of the nascent SLB market, its promising framework and some structural and financial characteristics making this fixed income instrument prone to greenwashing risks. Empirically, I show that SLBs trade at a sustainability premium on the primary market which implies that issuers benefit from lower cost of capital and investors accept lower yields for holding a sustainabilitylinked asset. The premium of 4.68 basis points on average declines to 3 basis points when moving to the secondary market. Moreover, the premium is volatile over time and vanishes during the second half of 2022. Finally, cross sectionally, there are differences regarding the premia with some SLBs exhibit higher yields compared to conventional bonds. Companies with the highest ESG score and companies that follow science-based targets priced tighter, i.e., those can expect lower cost of debt. Contrary, the cumulative size of the step-up in relation to the coupon of the bond is not a significant driver of the SLB premium, implying that this optional step-up is not a primary driver of SLB pricing. The remainder of the paper is structured as follows: Section ‘‘Related literature and hypotheses’’ reviews the related literature and posits hypotheses. Section ‘‘The sustainability-linked bond market’’ provides a market overview. Section ‘‘Data selection and methodology’’ highlights the sample selection process and the applied methodologies for the empirical part in section ‘‘Empirical results’’. Section ‘‘Robustness’’ provides robustness tests. Finally, sections ‘‘Discussion’’ and ‘‘Conclusion’’ discuss the findings and conclude. Related literature and hypotheses The academic research so far primarily focused on regular green bonds, because of their historical dominance in terms of issuance volume. Leading contributions in the field mainly provided mixed evidence whether green bonds trade at a ‘‘greenium’’ implying lower yields of green bonds compared to their conventional bond twin (Zerbib 2019; Baker et al. 2018; Hachenberg and Schiereck 2018; Gianfrate and Peri 2019) or, in contrast, either at higher yields as reported in Karpf and Mandel (2018) and Bachelet et al. (2019) or at no difference as in (Larcker and Watts 2020; Flammer 2021). The mixed evidence is presumably attributable to different time periods, issuer types, markets and empirical approaches. For example, some studies apply a matching approach to find a green bond’s ‘‘twin’’ and afterward regress its yield spread on remaining, not exactly matched explanatory variables (Zerbib 2019; Bachelet et al. 2019), while other studies—instead of filtering out most of the conventional bonds through a matching procedure—regress the bond yields on a set of controls and a green dummy variable, which is the effect of being green on the bond yield spread (Baker et al. 2018; Fatica et al. 2021). A recent study by Kapraun et al. (2021)—equipped with the largest dataset to date—concludes that investors became skeptical about the environmental impact of green bonds and those only exhibit a green bond premium (of -4 bps), if they are externally certified as well as having a high sustainable reputation. Overall, the mixed findings on greenium in green bonds raise questions about whether SLBs, despite their structural The pricing of sustainability-linked bonds on the primary and secondary bond markets 413 differences, might exhibit a similar sustainability premium. Accordingly, this study’s first hypothesis is: 1. SLBs exhibit a sustainability premium in both primary and secondary bond markets, similar to the greenium concept in green bonds. Counter to the above surveyed literature on green bonds research on SLB bonds is scarce. Most of the existing literature is qualitative, discussing the mechanism of SLBs and how SLBs could overcome the greenwashing-concerns GSS bonds are confronted with (Vulturius et al. 2022; Giraldez and Fontana 2022; Maino 2022). The few empirical studies are as follows: Liberadzki et al. (2021) find that the SLB issued by the British grocery and retailer Tesco priced lower than conventional bonds of the same issuer from French Carrefour and German Metro during the first half of 2021 even under the coupon step-up scenario. However, they match bonds with large differential in maturity. Ko ¨lbel and Lambillon (2022) find that SLBs price 29.2 bps lower than matched conventional bonds of the same issuer at issuance date on the primary market. Since the average step-up in their sample is 26.6 bps, issuers would benefit from a sustainability premium, even if they do not achieve their predefined performance target. They conclude SLBs are a ‘‘free lunch’’ to issuers. Berrada et al. (2022) create a conceptual framework that examines under which conditions SLBs incentivize company managers to exert effort, which will occur when the penalty saving is higher than the monetary cost of exerting effort to achieve the performance target. Moreover, environmental-concerned investors that observe manager’s effort, derive a benefit from the improved performance and are willing to pay higher bond prices. Therefore, companies with a more credible ESG-strategy could exhibit higher SLB premia as hypothesis 2 states: 2. Building on findings that issuer characteristics, such as ESG scores, influence bond pricing, issuer-specific characteristics are associated with an SLB premium. While SLBs hold potential to address certain limitations of green bonds, empirical research on their pricing remains limited, especially in comparison with green bonds. As most studies focus on the primary market, they may not account for changing market conditions, which could affect SLB pricing over time. For instance, Ko ¨lbel and Lambillon (2022) only compare primary market issuance yields, while Berrada et al. (2022) explore SLB mispricing by setting upper and lower pricing bounds but do not examine yield behavior over a longer time span. The role of SLB-specific features, particularly penalty mechanisms, is also an area needing further exploration. Existing research suggests that issuers could benefit from lower costs of capital by setting ambitious sustainability targets, substantial coupon stepups and longer periods to achieve these targets (Erlandsson and Mielnik 2022). These authors argue that greenium in SLBs should account for the option value of the step-up clause, as it can create optionality to receive higher payments if targets are missed. Therefore, hypothesis 3 posits: 3. Given the role of penalty structures in SLBs, its specific features, such as penalty magnitude for missed sustainability targets, affect the premium. Despite the rapid growth and importance of SLBs, significant gaps remain in understanding their pricing, particularly in secondary markets where changing conditions could impact yields. Given the structural differences between SLBs and green bonds, it is essential to investigate whether SLBs demonstrate similar premium and which unique factors might drive their pricing dynamics. The sustainability-linked bond market The inaugural bond was launched by Italian utility Enel S.p.A. in September 2019. The single tranche, totaling 1.5 billion USD, maturing in September 2024 and paying a rate of 2.65% is subject to the percentage of installed capacity in renewable energy. If a 55 percentage of installed renewable generation capacity (as a share of total consolidated installed capacity) had not been reached until December 31st, 2021, the coupon would have stepped up by ?25 bps to 2.9% p.a. until the bonds’ expiry date. In 2021, the performance target has been successfully reached; therefore, the rate remained at a 2.65% p.a. level. 4 According to Enel, the transaction was successful, enabling the Italian energy company to obtain a financial advantage equal to 20 bps compared to a conventional bond issuance (Enel 2019). 5 In the wake of the publication of the ICMA guidelines in June 2020, five core components were established to ensure a certain standard including: selection of a Key Performance Indicator, calibration of a sustainability performance target, definition of the varying bond characteristics (i.e., most commonly the magnitude of the coupon stepup), reporting standards and third-party verification. The prior stagnant issue volume of SLBs skyrocketed. In September 2020, the Brazilian pulp and paper company 4 Enel reported to have reached 57.5% of installed new renewable generation capacity by the end of 2021. 5 https://www.enel.com/content/dam/enel-common/press/en/2019September/SDG%20bond%20ENG%20(003).pdf 414 J. Poggensee Suzano issued the second $750 million SLB. As Fig. 1 shows, the last quarter in 2020 saw an issuance volume of $8 billion followed by a soaring growth in 2021. As for all (green) debt assets, the issuances in 2022 declined, affected by rising interest rates, a higher economic uncertainty, a worsening risk perception and the war in the Ukraine. Appendix Fig. 3shows that half of SLBs are denominated in Euro, followed by the USD. Together, the two currencies account for 86% of the issued volume. Next, Appendix Fig. 4plots the issuance volume across sectors in percent. Strikingly, carbon intensive ‘‘hard to abate sectors’’ like utilities, industrials or basic materials that are sometimes not compatible with the green bond standards (Maino 2022), represent a high portion of SLB issuance. About half of the bond’s performance indicators are related to a greenhouse gas emission target as Fig. 5shows. Among those, over 80% focus on scope 1 and scope 2 emissions, 6 whereas type 3 emissions, which are harder to measure but often representing most of a company’s emissions, 7 ) are rarely included. Emission-related KPIs have the advantage that they can be aligned with sciencebased scenarios more easily and some issuers had a history of reporting before the issuance. Since the issuance of SLBs is based on voluntary guidelines and principles established by the ICMA—leaving room for different interpretations—and no public authority setting a legal framework that monitors the issuance, SLBs could be prone to the risk of greenwashing primarily due to a small size of the (cumulative) coupon step-up that is not material, callable features to redeem the SLB before or shortly after the step-up materializes or unambitious performance targets achieved easily by the issuer. Figure 6plots the size of the coupon step-ups. The figures indicate that more than 50% of the SLBs are embedded with 25 bps penalty per annum either solely or aggregated if a bond carries more than one KPI. Regardless of the issuers rating its size or its coupon-rate, it is common practice to set the fee to 25 bps per annum. 8 In summary, SLB have emerged as promising instrument for sustainable finance, offering flexibility and financial incentives for issuers to achieve the stetted performance targets. However, the market could be prone to greenwashing, as issuers choose the targets independently and set the penalty. Data selection and methodology The next sections focus on the final sample selection process and the applied methodologies that investigate the pricing of SLBs on the primary and secondary bond markets. Sample selection Most of the data originates from Refinitiv’s ESG Bond Guide Database, which provides static GSS and SLB bonds, including size, maturity, issuance day, seniority and yield at issuance. Since the issuance of the inaugural SLB bond in 2019, Refinitiv has listed 526 SLBs as to the reporting date December 31 st , 2022. Secondly, Refinitiv Eikon’s bond viewer app displays SLB terms, for instance, the KPI description, the magnitude of the coupon step-up or the coupon payment dates. Since the SLB details are partly not yet comprehensive, terms were also collected manually, based on company press releases, investor relations, the offering memorandum and bond prospectuses. Additionally, the bond viewer app provides the debt structure of the issuer including all other active conventional bonds trading on the debt market and gives access to pricing and yield data. I download the time series data of all issuers’ active bonds since the issuance day of the SLB until September 30th, 2022. Time series data includes bid and ask yields, the yield to maturity, swap spreads, ask and bid prices, modified duration and the remaining time to redemption. From the initial 526 bonds, 76 bonds are dropped that exhibit a bifurcated structure. 9 Secondly, 70 bonds with a 4,2 8,6 97,42 71,32 2019 2020 2021 2022 VOLUME YEAR SLB ISSUANCE VOLUME IN BILLION USD Fig. 1 Issuance volume. This figure plots the amount of issued SLBs in billion USD between 2019 and 2022 according to data from Refinitiv. 6 The greenhouse gas protocol differentiates between different scopes of emissions. Scope 1 emissions are direct emissions a company causes during its production process. Scope 2 emissions are indirect emissions from the generation of purchased electricity, heat or steam. Scope 3 emissions are consequences of a company’s indirect activities in its value chain. 7 According to Deloitte, Scope 3 is nearly always the biggest one and accounts for more than 70% of firms carbon footprint (https://www2. deloitte.com/uk/en/focus/climate-change/zero-in-on-scope-1-2-and-3emissions.html 8 Step-ups make up approximately 75% of the penalization scheme. Besides step-ups, the other common financial incentives associated with KPIs are coupon step-downs, redemption premia where the issuer pays a predetermined premium on the redemption price at maturity, donations to foundations or organizations of the issuer’s choice, early redemption where the bond is redeemed earlier at a predefined price and the purchase of carbon credits proportionate to the principal amount The pricing of sustainability-linked bonds on the primary and secondary bond markets 415 varying coupon-type and 109 bonds that have either issued no other or a single bond are left out. Refinitiv Eikon lacks continuous yield and pricing data for some Chinese issuers, so those are also not considered. Additionally, only SLBs that have been issued before June 30th, 2022 are included within the sample and all bonds that have a callable feature are excluded because they could affect the pricing. Following Berrada et al. (2022), I keep bonds with a clean-up call option (where the bond can be called within the last three months of maturity) and with a makewhole callable feature (redeeming the bond is associated with higher costs for the company). Table 1shows the sample selection procedure in more detail. To ensure comparability between SLBs and conventional bonds, a matching approach was applied based on specific criteria such as issuer, currency, coupon structure and credit rating. These conditions were essential in identifying comparable bonds for the final sample of 45 SLBs. Methodology for primary market analysis The primary goal of the analysis is to determine whether SLBs exhibit a sustainability premium on the issuance day by comparing their yields to those of matched conventional bonds. This is done by applying the Nelson–Siegel– Svensson (NSS) method to construct yield curves for each issuer and overlaying the SLB’s yield to assess its relative positioning. In the first step, the presence of yield differentials between SLBs and matched conventional bonds—based on the issuer, coupon structure, currency and rating structure—is investigated on the pricing date of the SLB, where its yield, coupon and price are determined subsequently to the initial price talks, the book-building process and the allocation to investors. The SLB’s yield at issuance representing the yield the investor receives if the bond is held till maturity and performance targets are met (and the penalty mechanism does not materialize) 10 —is compared to the yield to maturity of conventional bonds already trading in the secondary market. The comparison allows to identity if SLBs are priced at lower yields. Therefore, the method of the Climate Bond Initiative (CBI 2017) is extended by applying the Nelson–Siegel– Svensson (NSS) method (Nelson and Siegel 1987; Svensson 1994). Typically, central banks estimate sovereign yield curves to obtain an empirical representation of the term structure of interest rates, serving as a key reference point for many other markets (Andersen 2018). The Appendix discusses the NSS and its application more detailedly. The NSS method infers (theoretical) yields over the bonds’ remaining time to maturity spectrum visualized by fitting a yield curve for each of the 45 SLB-bond issuers on SLB’s pricing day. Afterward, the yield of the SLB is overlayed to determine whether its yield at issuance is below, in line or above its curve. If an SLB bond is below its yield curve it suggests a sustainability premium, where investors receive a lower yield, and issuers face lower cost of debt as they would have expected to receive if they would had held (issued) a conventional bond which is interpreted as evidence for sustainability premium investors pay. This approach offering a new perspective compared to the traditional green bond literature, which typically regress a panel of issuance yields for green and conventional bonds on a green dummy variable along with issuer and bond-specific data (Kapraun et al. 2021; Baker et al. 2018; Fatica et al. 2021). Methodology for secondary market analysis To analyze the yield differentials between SLBs and conventional bonds on the secondary market subsequently, a stricter matching approach was applied as in Zerbib (2019), Bachelet et al. (2019), Kapraun et al. (2021), Larcker and Watts (2020), Flammer (2021), or Gianfrate and Peri (2019). Unlike traditional regression methods, regressing the bond yields on their characteristics and a ‘‘green’’ Table 1 Final sample Sample reduction Number of SLBs Initial sample 526 Less issued after June 30th, 2022 -89 Less bonds with both RegS and 144A offering -76 Less floating coupon structure -56 Less Chinese issuers/missing pricing data -63 Less no CB -56 Less 1 or 2 CB -53 Less maturity matching -35 Less other matching criteria -53 Sample size 45 Table 1Summarizes the selection process, showing the final sample of 45 SLBs after the exclusions. 9 152 SLBs are issued in a bifurcated structure having both a 144A offering, where the securities primary offered to US investors and a RegulationS offering, that covers an investor base outside the US. It is common for companies to issue both 144A and RegulationS securities. Refinitiv lists both the RegS and the 144A portion of the bond within its database, but to avoid double-counting the totals of the RegS offering type are not included and counted a second time. 10 Its industry practice to quote SLB yields without considering the potential (coupon) penalty (Berrada et al. 2022). All the collected SLB data from Refinitiv is quoted without the possible step-up. 416 J. Poggensee dummy variable for the sustainable label, a matched-pairs approach is applied that allows for isolating the ‘‘sustainability’’ label effect directly by controlling for bond characteristics that impact both SLBs and conventional bonds similarly. A matched-pairs approach offers advantages by controlling for variables that affect yield spreads similarly. This method isolates the specific effect of the sustainable label on bond yields by creating synthetic bond with the same residual maturity as the SLB. As noted by Zerbib (2019) and Bachelet et al. (2019), this approach is more appropriate for distinguishing yield differentials because it minimizes the noise that could result from unobserved differences between bond characteristics, which are not captured by dummy variables. It has become a widely accepted method in the green bond literature for measuring the pricing effect of sustainability labels (Kapraun et al. 2021). To achieve a higher degree of accuracy, only the two closest and most similar bonds, regarding redemption date, amount outstanding and coupon size, are selected for comparison. Via linear interand extrapolation, a synthetic bond is constructed with the same residual maturity as the SLB. By comparing these synthetic bonds with the SLBs, the matched-pairs approach can more precisely measure any sustainability premium. Following Zerbib’s (2019) argumentation, only differences in liquidity and maturity which both cannot exactly be matched should explain yield differentials between bonds of the same issuer. Therefore, a synthetic bond is created by selecting two conventional bonds with the closest maturity, spanning an interval of ?/- 3 years to the SLB again having the same characteristics (same issuer, currency, seniority (payment rank), callable or bullet structure, rating) except the sustainability label. On each respective day of the remaining SLB’s tenor, the ask yield of the synthetic bond is linearly interor extrapolated to account for maturity differences. The inferred theoretical yields of the synthetic bond match the SLB’s residual maturity. Beyond the matching approach and the creation of the synthetic bond, liquidity differentials remain a potential driver of ask yield differentials. Therefore, the ask yield differential of the bond pairs Dy i,t is regressed on the bond pairs bid–ask spread via fixed-effects panel regression following the methodology used by Zerbib (2019), Kapraun et al. (2021), Bachelet et al. (2019), to extract the sustainable effect as: Dyi;t¼piþDLiquidityi;tþei;tð1Þ with pi being the fixed effect that captures the time-invariant unobserved ‘‘sustainable’’ effect for each issuer. Hence, pi is the residual difference between a SLB and the synthetic conventional bond that is attributable to the sustainable label of the bond, after controlling for liquidity differences. To measure liquidity spreads DLiquidity i, bid– ask spreads are used, one of the most widespread proxies for bond liquidity (Fong et al. 2017). Finally, a cross-sectional regression is conducted to investigate the determinants of the varying sustainability premium across issuers, the sustainability fixed effect p i of each of the 45 issuers is regressed on a set of control variables. pi¼aoþControlsiþei:ð2Þ Control variables include quantitative variables, i.e., the maturity, the issued amount and qualitative variables: rating and the currency. Rating is a scaled variable which is assigned in ascending order, while currency is a dummy variable equal to 1 if the SLB is issued in USD. Moreover, SLB-specific controls in terms of the coupon step-up and the commitment to science-based targets are added. Empirical results The next section presents the results of the yield curve fitting for the primary market in 5.1 and the results of the fixed-effect panel regression after applying a matching procedure. Primary market results Appendix Fig. 7plots the estimated yield curves for each of the 45 SLB issuers. The blue dots represent the conventional bonds yield to maturity—given its remaining lifetime—while the green dots show the yield at issuance of the SLB. Overall, the yield curves demonstrate the typical structure, positively slopped with higher long-term debt yields. Besides, the SLB yield and the inferred conventional bond yield differ from each other. While some bonds (Snam, A2A, Carrefour, Novartis) exhibit a new issue concession implying that the SLBs trade above the yield curve (to the benefit of investors), most of the SLBs trade at slightly (Deere, London Quadrant) or clearly lower yields (i.e., Suzano, Ana Holdings, General Mills). Overall, this confirms the first part of hypothesis 1 that SLBs trade at a premium on the primary market. Moreover, this finding is consistent with Baker et al. (2018), Fatica et al. (2021)or Kapraun et al. (2021) who find that green municipal and green corporate bonds trade at a ‘‘greenium’’ at issuance implying lower yields compared to conventional bonds. The difference in the mean of yields between is -4.68 basis points, which implies that issuers on average can expect lower cost of capital if they issue SLBs, provided that the penalty does not materialize prospectively. This is The pricing of sustainability-linked bonds on the primary and secondary bond markets 417 consistent with Berrada et al. (2022), concluding that 20% of the SLBs are overpriced (to the benefit of the issuer and its shareholders) and with Ko ¨lbel and Lambillon (2022), although the yield difference is much lower than theirs. The p value of a paired two-sided t test and a nonparametric Wilcoxon test, provided in Table 2, confirm that the yields are significantly different from each other. Finally, the distribution of yield differences is plotted in Fig. 2representing the kernel density for the 45 bond pairs in basis points. A large mess is centered slightly left from zero yield differential, skewed to the left with thin tails indicating that SLBs trade at lower yields and some exhibit particularly large differentials. The blue dashed line plots the median of the distribution which is also negative (-2,56 basis points). Secondary market results The primary market analysis examines yield differentials solely on the issuance day which can be influenced by a gap between debt supply and demand (for instance, rate hikes could occur on the issuance day). Table 3reports summary statistics. The average SLB yield in the sample is 2.10 % (210 bps) and below the synthetic bond yield which is 2.12%. Moreover, the synthetic bond is more volatile than the SLB and the bid–ask spread between the bond pairs is centered around zero with a low standard deviation. Before estimating the yield differentials, a bunch of statistical tests is applied. Appendix Table 7lists the results. A Hausman test indicates that the fixed-effects regressor is more efficient than the random effects estimator. Since the Breusch–Pagan test implies that the error variances are heteroscedastic equation (1) is estimated with robust standard errors. Moreover, Beck–Katz robust estimation is used to address the presence of serial correlation Table 2 Paired t test and Wilcoxon test. Statistic Value Yield SLB (bps) 141.96 Yield CB (bps) 146.64 Yield differential (bps) -4.68 p value t test 0.01 p value Wilcoxon test 0.05 Do SLBs trade at lower yields on the primary market? Table 2reports the mean differences, parametric and nonparametric tests between yields at issuance of SLBs ‘‘Yield Green’’ and matched conventional bonds ‘‘Yield Brown’’ as described in section ‘‘Methodology for primary market analysis’’. 0.00 0.01 0.02 0.03 0.04 -50 -25 025 50 YieldDiff density Yield Differential Density Curve Fig. 2 Density curve of yield differentials in basis points. This figure plots the density of the SLBand conventional bond yield differential across 45 SLBs. The SLB yield is the yield at issuance, while the conventional bond’s yield is the estimated NSS yield at the same maturity by fitting a yield curve. The x-axis plots the yield differential, whereby a negative value is an indication that a premium exists. The blue dashed line is the median of the yield difference. 418 J. Poggensee -0.1% 0.2% 0.5% 0.8% 0612 YIELD MATURITY A2A 0.0% 0.6% 036 YIELD MATURITY AeonMall27 0.0% 0.6% 1.2% 0369 YIELD MATURITY Ana Holdings 0.0% 0.3% 0.6% 036 YIELD MATURITY Aeon Mall 26 0.0% 1.5% 3.0% 01020 YIELD MATURITY Analog Device 0.0% 1.5% 3.0% 048 YIELD MATURITY Carrefour 26+29 0.0% 1.0% 2.0% YIELD MATURITY CPI 2.0% 3.0% 4.0% 0510 YIELD MATURITY Deere -0.4% 0.0% 0.4% 0.8% 0510 YIELD DURATION Eni 1.0% 2.0% 3.0% 49 YIELD MATRUTIY General Mills 0.0% 0.5% 1.0% 036 YIELD MATURTIY Helsingborg 0.75 0.0% 0.7% 1.4% 02.55 YIELD MATURITY Helsingborg 0,875% -0.3% 0.1% 0.5% 0.9% -3 2 7 12 YIELD MATURITY Holcim 0.0% 0.5% 1.0% 04812 YIELD MATURITY… HolcimHelvetia -0.2% 0.1% 0.4% 0 5 10 15 YIELD MATURITY Legrand 1.5% 2.5% 41016 YIELD MATURITY London Quadrant -0.2% 0.4% 01020 YIELD MATURITY Novartis 0.015 0.04 0612 YIELD MATURITY NWD -4bp Fig. 7 Yield Curves estimated by Nelson–Siegel–Svensson method. Plots yield curves for 45 issuers on their respective pricing date. The blue dots are the observed yields of the issuer’s conventional bonds that trade on the secondary market. A yield curve is fitted with the NelsonSiegel Svensson method. Finally, the SLB is overlaid. A SLB below its curve implies a sustainable premium. The pricing of sustainability-linked bonds on the primary and secondary bond markets 425 0.0% 0.3% 0.5% 048 YIELD MATURITY Obayashi 0.0% 1.5% 3.0% 0510 YIELD MATURITY Optus 0.0% 1.0% 2.0% 0510 YIELD MATURITY Pernot Ricard -1.0% 1.0% 0612 YIELD MATURITY Repsol 1.5% 2.5% 0612 YIELD DURATION Sempcorb 0.00% 5.00% 46810 YIELD DURATION S&P Y… 3.0% 4.0% 0510 YIELD MATURITY Sembcorp22 0.0% 0.5% 1.0% 1.5% 0 5 10 15 YIELD MATURITY Snam 0.0% 0.2% 0.4% 310 YIELD MATURITY TDK 0.2% 0.4% 0.6% 0.8% 0 5 10 15 YIELD MATURITY Toda 1.5% 3.0% 0102030 YIELD MATURITY Telus 0.5% 1.5% 048 YIELD DURATION Sanofi 0.2% 0.3% 0.4% 0.5% 0.6% 0612 YIELD MATURITY Hulic 0.0% 0.3% 0.6% 0612 YIELD MATURITY Fuyo Fig. 7 continued 426 J. Poggensee Appendix: Tables See Tables 7,8,9,10. 0.5% 1.5% 2.5% 0612 YIELD MATURITY Woolworth 2.5% 4.0% 5.5% 0102030 YIELD MATURITY Suzano 2020 0.0% 0.6% 0246 YIELD MATURITY Axpo 2.0% 3.0% 4.0% 051015 YIELD MATURITY Suzano 2032 0.2% 0.4% 0.6% 0510 YIELD MATURITY Enel 2019 Euro 0.5% 1.5% 2.5% 0612 YIELD MATURITY Enel2021 USD 1.0000% 0 5 10 15 YIELD DURATION Suzano 2028 YTM Fig. 7 continued Estimated Yield Differential 4 3 2 1 0 -1 -2 -3 22 22 Mar-22 22 May-22 22 22 22 Sep-22 YIELD Fig. 8 Estimated Secondary Market Premium over time. Refers to a time trend in the sustainability premium. Instead of estimating the baseline-equation Dy i, =p i ?DLiquidity i,t ?e i,t over all time periods, the sample is divided into monthly subsamples to measure the sustainability premium for each month. The estimated average fixed effect p i (i.e., the sustainability premium) is plotted for each month from January 2022 to September 2022 The pricing of sustainability-linked bonds on the primary and secondary bond markets 427 Table 7 Statistical tests Test Statistic p value Interpretation Conclusion F test for individual effects 133.86 0 Reject the null hypothesis that a model with no independent variables fits better Presence of individual effects Hausman test 8.1111 0.0044 Reject the null hypothesis of no correlation between errors and regressors Use of fixed effects Breusch–Pagan test for heteroscedasticity 70.191 0 Reject the null hypothesis that the error variances are all equal Presence of heteroscedasticity Breusch–Godfrey/Wooldridge test for serial correlation 8379 0 Reject the null hypothesis of no autocorrelation between the residuals Presence of serial correlation Pesaran test for cross-sectional dependence 14.088 0 Reject the null hypothesis of no cross-sectional dependence Presence of cross-sectional dependence Table 8 Estimated premia on the primary and on the secondary market Issuer Primary market estimation Secondary market estimation A2A 4.34 8.61 AeonMall26 -23.76 -12.74 AeonMall27 -2.56 -3.02 AnaHoldings -40.53 -5.94 AnalogDevice -2.31 5.55 Axpo25 -8.66 -5.17 Axpo27 4.19 1.93 Carrefour26 11.43 7.03 Carrefour29 8.09 9.77 CPI -5.79 3.75 Deere -4.93 1.8 Enel24 -4.21 0.8 Enel27 5.41 5.1 Enel26USD -7.56 -9.19 Enel28USD 0.52 -6.19 Eni 5.26 3.07 Fuyo -2.29 3.23 GeneralMills -10.73 -11.43 Helsingborg0.75 -20.07 -7.98 Helsingborg 0.875 -22.87 -2.13 Holcim -2.62 -1.7 HolcimHelvetia -4.23 -1.4 Hulic -11.52 3.25 Legrand 7.63 -9.55 LondonQuadrant 1.07 -0.9 Novartis 5.98 6.69 NWD -4.53 7.03 Obayashi -11.25 -6.84 Table 8 continued Issuer Primary market estimation Secondary market estimation Optus 5.02 6.90 Pernod 2.49 -3.18 Repsol 1.26 15.84 S?P 9.17 -14.11 Sanofi 0.46 -1.89 Sembcorp -7.84 0.24 Sembcorp22 -1.95 -5.32 Snam29 10.04 -16.57 Snam34 7.91 -9.76 Suzano20 -27.67 -18.09 Suzano28 -16 -33.60 Suzano32 -39.41 -7.87 TDK26 -4.62 -4.75 TDK28 -1.08 -1.03 Telus -3.86 -9.09 Toda 7.67 -12.53 Woolworth -14.72 -2.81 This table shows the estimated premia on the primary and on the secondary market. The primary market estimation is the difference between the yield of the SLB at issuance and the yield curve estimated with the NSS method. A negative value implies a sustainability premium. Table 9 Fixed-effects regression with volatility control Statistic N Mean St. Dev. MinMedian Max p i 45 -0.024 0.085 -0.327-0.018 0.159 This table shows the distribution of the estimated SLB premium. The premium is defined as the fixed effect p i of the regression Dy i,t =p i ? DLiquidity i,t ?DVolatility i,t ?e i,t . Volatility is the 10-day rolling annualized volatility of the SLB and the synthetic bond calculated ex post. 428 J. Poggensee Table 8: Comparison of Estimated Sustainability Premia on the Primary and on the Secondary Bond Market The primary market estimation is conducted by fitting yield curves for each issuer. Afterward, the yield of the SLB is compared with the inferred yield with the same residual maturity. The secondary market premia are estimated via a fixed-effect panel regression. A negative value is evidence for a sustainable premium; hence, SLBs would trade at lower yields compared to their matched conventional bonds. Appendix: The Nelson–Siegel–Svensson Method A parametric model, the Nelson–Siegel–Svensson (NSS mode), is applied to infer theoretical prices (and yields) over the maturity spectrum visualized by a yield curve for each of the 45 SLB-bond issuers. Nelson and Siegel established a parsimonious nonlinear optimization model where parameters reflect the typical shapes of yield curve (Nelson and Siegel 1987). By integrating the solution of a second order-differential equation, they specify the spot rate (zero-coupon bond yield) as a function of maturity and on the below defined beta parameters of the following form: zb;mðÞ¼b0þb1 1exp m k1  m k1 0 @1 A þb2 1exp m k1  m k1 exp m k1  0 @1 A þb3 1exp m k2  m k2 exp m k2  0 @1 Að5Þ The NSS-model, which is extensively used by central banks, 13 describes the term structure of interest rates (spot rates) by six parameters that represent long-run level of interest, the slope and the curvature. b0represents the long-term interest rate and is always greater zero, b1is the spread between the longand the short-term interest rate and generates a monotonically increasing (if b1is negative) or decreasing function (if b1is positive), while the b2parameter generates a hump-shape (if positive) or U-shaped (if negative) function. k1specifies the position of the hump or U-shape (decay factor). The last term b3with an additional k-parameter adds an additional turning point and is an extension of the NSmodel made by Svensson to better capture more complex term structures in the short and in the long-term (Svensson 1994). From the sport rate, Svensson derives the discount function as of the form: dm;bðÞ¼exp zt;m;bðÞ 100 m  ð6Þ This equation discounts each payment flow to its present value with varying maturity-related spot) rates. Finally, the discount function is used to derive theoretical prices and yields over the maturity spectrum and those are compared with the actual observed ones that trade in the market by solving an optimization problem of the form Table 10 Estimation of the sustainable premium Dependent variable Model1 Yield Model2 Model (1) (2) Variables SLB -0.0284 *** -0.0237 *** (0.0055) (0.0050) Maturity 0.1057 *** 0.0388 *** (0.0053) (0.0040) BidAskSpread 0.4298 *** 0.4042 *** VIX (0.0202) (0.0326) 0.0332 *** (0.0006) ShortTreasury 0.2037 *** (0.0055) LongTreasury 1.145 *** (0.0067) Fixed-effects Issuer Yes Yes Rating Yes Yes Currency Yes Yes Date Yes Sector R2 Yes 0.94 0.96 Observations 24,405 24,101 Table 10 refers to equation 4and tests whether SLBs exhibit a premium. Each SLB’s and its conventional bond’s ‘‘twin’’ yield are regressed on a set of dummy variables including issuer, rating, currency, sector and time fixed effects. Controls for liquidity (bid–ask spread) and maturity are added and a ‘‘green’’ dummy specifies the yield differential between the bond pairs. The second specification adds macrovariables, i.e., the VIX, the short-term 3-month US-treasury rate and the long 10-year US-treasury rate. Heteroscedasticity– robust standard errors are in parentheses. *** implies significance at the 1% level, ** at the 5% level and * at the 10% level 13 The ECB estimates daily yield curves for the euro area and derives forward and par yield curves based on the NSS method The pricing of sustainability-linked bonds on the primary and secondary bond markets 429 PN i¼1ðyi;t-~ yi;tðbt)) 2 that is determined to minimize the sum of squared yield deviations. The final b estimates are used to plot the yield curves for each issuer. Since deviations between actual and NSS estimated yields have been minimized, the curve will approximately fit the observed yields. Funding Open Access funding enabled and organized by Projekt DEAL. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons. org/licenses/by/4.0/. References Andersen, P.M. Yield curve modelling and a conceptual framework for estimating yield curves: Evidence from the European Central Bank’s yield curves, ECB-Working Paper No. 27 (2018). Bachelet, M.J., L. Bechetti, and S. Manfredonia. 2019. The green bonds premium puzzle: The role of issuer characteristics and third-party verification. Sustainability 11 (4): 1098–1120. Baker, M., D. Bergstrasser, G. Serafeim, and J. Wurgler. 2018. Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds, NBER Working Paper Series. Bauer, R., and D. Hann. 2014. Corporate Environmental Management and Credit Risk, Working Paper. Berrada, T., L. Engelhardt, R. Gibson, and P. Krueger. 2022. The Economics of Sustainability-Linked Bonds, Swiss Institute Research Paper. Bundesbank. 2019. The sustainable finance market: a stocktake, Monthly Report. CBI. 2017. Green Bond Highlights 2017. Doumbia, D., and I. Haq. 2022. Structural Loopholes in Sustainability-Linked Bonds, World Bank Policy Research Paper 10200. Eccles, R.G., I. Ioannou, and G. Serafeim. 2014. The impact of corporate sustainability on organizational process and performance. Management Science 60 (11): 2835–2857. Ehlers, T., and F. Packer. 2017. Green bond finance and certification. BIS Quarterly Review. Enel. 2019. Enel Launches the world’s first ‘‘general purpose SDG linked bond’’, successfully placing a 1.5 billion U.S. dollar bond on the U.S. market. Erlandsson, U. and S. Mielnik. 2022. An option pricing approach for sustainability-linked bonds, Anthropocene Fixed Income Institute Discussion Paper. Fatica, S., R. Panzica, and M. Rancan. 2021. The pricing of green bonds: Are financial institutions special?. Journal of Financial Stability 54: 2688–2701. Flammer, C. 2021. Corporate green bonds. Journal of Financial Economics 142 (2): 499–516. Fong, K.Y.L., C.W. Holden, and C.A. Trzcinka. 2017. What are the best liquidity proxies for global research?. Review of Finance 21 (4): 1355–1401. Gianfrate, G., and M. Peri. 2019. The green advantage: Exploring the convenience of issuing green bonds. Journal of Cleaner Production 219: 127–135. Giraldez, J., and S. Fontana. 2022. Sustainability-linked bonds: The next frontier in sovereign financing. Capital Markets Law Journal 17 (1): 8–19. Hachenberg, B., and D. Schiereck. 2018. Are green bonds priced differently from conventional bonds?. Journal of Asset Management 19 (6): 371–383. Haq, I.U., and D. Doumbia. 2022. Structural Loopholes in Sustainability-Linked Bonds, World Bank Policy Research Paper. Hatzmark, S.M., and A.B. Sussmann. 2019. Do investors value sustainability? A natural experiment examining ranking and fund flows. The Journal of Finance 74 (6): 2789–2837. ICMA. 2020. Sustainability-Linked Bond Principles. International Capital Markets Association. Kapraun, J., C. Latino, C. Scheins, and C. Schlag. 2021. (In)-Credibly Green: Which Bonds Trade at a Green Bond Premium? Proceedings of Paris December 2019 Finance Meeting. Karpf, A., and A. Mandel. 2018. The changing value of the green label on the US municipal bond market. Nature Climate Change 8 (2): 161–168. Ko ¨lbel, J.F. and A.P. Lambillon. 2022. Who pays for sustainability? An analysis of Sustainability-Linked Bonds. Swiss Finance Institute Research Paper. Krueger, P. 2015. Corporate Goodness and Shareholder Wealth. The Journal of Finance and Economics 115 (2): 304–329. Larcker, D.F., and E. Watts. 2020. Where’s the Greenium?. Journal of Accounting and Economics 69: 1–26. Liberadzki, M., P. Jaworski, and K. Liberadzki. 2021. Spread analysis of the sustainability-linked bonds tied to an issuer’s greenhouse gases emissions reduction target. Energies 14: 1–12. Libertore, S.M. 2021. Sustainability-Linked Bonds do not fit our impact framework, Nuveen. Maino, A. 2022. Sustainability-Linked Bonds and their role in energy transition, Oxford Institute for Energy Studies. Nelson, C.R., and A.F. Siegel. 1987. Parsimonious modeling of yield curves. The Journal of Business 60 (4): 473–489. Pastor, L., R.F. Stambaugh, and L.A. Taylor. 2021. Sustainable investing in equilibrium. Journal of Financial Economics 142 (2): 550–571. Pedersen, L.H., S. Fitzgibbons, and L. Pomorski. 2021. Responsible investing: The ESG-efficient frontier. Journal of Financial Economics 142 (2): 572–597. Pietsch, A., and D. Salakhova. 2022. Pricing of green bonds: Drivers and dynamics of the greenium, ECB Working Paper Series No. 2728. Reznick, M., R. Usson, and S. Demare. 2022. Do Sustainabilitylinked bonds have a step-up problem? Hermes International. Svensson, L.E.O. 1994. Estimating and Interpreting Forward Interest Rates: Sweden 1992-1994, NBER Working Paper, Working Paper No. 4871. Tuhkanen, H., and G. Vulturius. 2020. Are green bonds funding the transition? Investigating the link between companies’ climate targets and green debt financing. Journal of Sustainable Finance & Investment 12 (4): 1194–1216. Vulturius, G., A. Maltais, and K. Forsbacka. 2022. SustainabilityLinked Bonds—Their potential to promote issuers’ transition to net-zero emissions and future research directions. Journal of Sustainable Finance and Investment 14: 116–127. 430 J. Poggensee Zerbib, O.D. 2019. The effect of pro-environmental preferences on bond prices: Evidence from green bonds. Journal of Banking and Finance 98: 39–60. Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Jannis Poggensee is a Ph.D. candidate at the Quantitative Business and Economics Research (QBER) group at the University of Kiel. The QBER Institute is part of the Faculty of Economics at Kiel University and deals with current empirical research in economics, business and econometrics. My research is primarily centered on sustainable finance, with a particular focus on the signaling effects of ESG-related debt issuance in capital markets and pricing differentials between ESG-related on conventional assets. My work also investigates the pricing mechanisms of climate and carbon risks in both stock and bond markets. Through my research, I aim to contribute to a deeper understanding of how sustainability considerations are integrated into financial decision-making. I declare that there is no conflict of interest associated with this submitted paper. The pricing of sustainability-linked bonds on the primary and secondary bond markets 431