First-time acquisition of Sustainability-linked Debt in Shipping : Effects on Shareholder Distribution and Investor Appetite

Abstract

The allocation of capital to green projects has increased in recent years, as companies across industries increase their commitments to become more sustainable. In a regulatory environment where sustainability and an environmental perspective have become an issue of the highest priority, decarbonization is high on the agenda. Presently, the shipping industry is facing ever greater challenges, most notably regarding fuel and energy consumption whilst committing to the sustainable energy transition. Consequently, shipping companies must make important financial decisions regarding technological improvements of their fleet in an evertightening sea of international regulations. Since the Paris Agreement was signed in December 2015, the evolution of sustainabilitylinked finance instruments has grown exponentially. The growth in such instruments is, in part, a reflection of the pressure from regulators, consumers, and investors on businesses to prioritize ESG issues and sustainability in their strategic decision-making. As a result, shipping companies are leveraging sustainability-linked finance instruments, primarily through sustainability-linked loans and sustainability-linked bonds, to communicate their sustainability targets and compensate investors if sustainability targets are missed. The latter raises an important question concerning whether sustainability-linked debt financing attracts certain shareholders - and does it affect investor appetite? This study addresses this question by investigating the change in shareholder distribution for institutional, family, and public investors following firms’ first-time acquisition of sustainability-linked debt instruments. Employing fixed effect panel regression models and difference-in-difference models, we find evidence of increased ownership for institutional and public investors following shipping firms’ first-time acquisition of sustainability-linked debt. Our findings from the difference-in-differences models suggest that institutional and public investors reallocate capital to firms that acquire sustainability-linked debt compared to peers that do not. Findings for family investors are inconclusive. The implications of the findings are that the shareholder distribution amongst institutional and public shareholders in publicly listed shipping companies increases after the first-time acquisition of sustainability-linked debt. We also find that investor appetite is higher for firms that acquire sustainability-linked debt compared to shipping firms that do not.