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Do sustainability-linked bonds have a step-up problem?

Sustainability-linked bonds (SLBs) have grown rapidly since 2019 but the market’s preferred method for punishing companies that miss sustainability targets is flawed, argues Mitch Reznick, Federated Hermes Head of Sustainable Fixed Income.

  • Sustainability-linked bonds (SLBs) have grown rapidly over the last year
  • The market’s preferred mechanism for punitive fees when a company misses sustainability targets is a coupon step-up, most often set at 25bps
  • Because the flat rate of 25bps doesn’t consider the scale of a business, the materiality of this as an incentive is inconsistent across companies, and thus undermines credibility of the market

To facilitate the growth and protect the health of the SLB market, we suggest replacing the fixed 25bps step-up with a feature that flexes with the scale of the issuing company

Risk profile
  • This information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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