Given the pressing need for sustainable economic transformation and the existing funding gap for global sustainability goals, our study investigates the financing benefits of sustainability-linked bonds (SLBs) for issuers pursuing sustainable corporate transformation. As a novel innovation in the bond market, SLBs incentivize sustainability by linking financial rewards or penalties to the achievement of sustainability performance targets (SPTs). We evaluate primary market yield differentials by comparing 90 corporate SLBs issued between 2021 and 2023 with conventional bonds (CBs) from the same issuers and with similar characteristics.

Our findings reveal that SLBs have lower initial yields compared to CBs, with an average difference of -13.31 to -30.21 basis points (bp). This yield advantage, referred to as “sustainium”, reflects the growing investor preference for ESG-focused investments. Our analysis indicates that the sustainium is smaller for EUR-SLBs and larger for callable bonds. We find no significant impact of coupon step-up penalties and target maturities on the yield differential. These findings raise concerns about ESG washing, emphasizing the importance of stricter regulation and diligent investor scrutiny.