Sustainability-Linked Loan

Unlike green loans, which must be used for specific environmental projects, sustainability-linked loans can be used for general business purposes. The sustainability element comes from targets the borrower agrees to meet, measured by key performance indicators.

For example, a company might agree a loan whose interest margin falls by 0.05 percentage points if it cuts its greenhouse gas emissions by a set amount, and rises by the same amount if it misses the target.

Targets might cover emissions, energy efficiency, renewable energy use, water use, workplace safety or diversity. The Loan Market Association and similar bodies publish the Sustainability-Linked Loan Principles, which recommend that targets be meaningful, ambitious and independently verified.

Sustainability-linked loans give companies a financial incentive to improve their performance and signal their commitment to sustainability. Critics argue that some targets have been too easy, that the interest rate adjustments are too small to change behaviour and that weak targets can amount to greenwashing. Lenders and regulators have pushed for more ambitious and transparent targets.