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

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.