In the article, Bruno Caron comments on the penalties for failing to meet sustainability-linked bonds targets.
…the penalty for failing to meet SLB targets “is sometimes very low.” The average increase in a bond’s coupon rate, he said, is about 25 basis points (a percentage point is 100 basis points). […]
Raising penalties, however, would not be as simple as it sounds. If the gap between the base interest rate and the penalty interest rate in an SLB is high enough, Mr. Caron said, an investor betting on a certain issue to miss its targets could buy the SLB at a low price before the penalty rate kicks in, then sell at a higher price once the higher rate kicks in and pocket the difference.
“If the penalty is too high, then you run the risk of an arbitrage investor coming into the market and buying those bonds,” he said. “That would defeat the purpose of these instruments.”
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