Unveiling greenwashing and uncovering prominent sustainability premiums: Study on sustainability-linked bond issuances and second-party opinions

Abstract

I study incentives behind sustainability-linked bond ("SLB") issuances, a novel instrument type usually structured to link reaching sustainability targets to coupon payments. SLB issuers can obtain second party opinions ("SPOs") to verify their instrument designs' alignment with general principles created by International Capital Markets Association. I show the presence of these opinions to predict greater sustainability premiums for SLBs, indicative of possible financial incentives behind obtaining one. However, despite even the issuers' explicit promises, I show SLB issuances to not be credible signals of sustainability commitments but to rather raise greenwashing concerns as the issuers' sustainability performance deteriorates in environmental, social and combined ESG measures post issuance, regardless of whether an SPO is present or not. Additionally, I show that high reputation of the SPO provider or whether the SPO has been publicly disclosed have no significant predictive capabilities over SLBs' cost of capital, nor that they would improve the credibility of sustainability commitment signals.