The Issuance and Design of Sustainability-linked Loans

Abstract

We explore whether sustainability-linked loans (i.e., syndicated loans for which pricing is linked to a sustainability performance indicator) can facilitate meaningful sustainability performance objectives. We find that sustainability-linked lending is more prevalent among low ESG-risk borrowers. Pricing provisions usually include immaterial performance indicators and weak targets, which are not related to a borrower’s ESG risk. When borrowers are of higher ESG risk, loans are no more likely to include a pricing penalty or greater pricing adjustments. In addition, lenders employ contractual mechanisms to mitigate information processing costs with respect to monitoring sustainability performance indicators. Overall, we provide evidence consistent with the view that sustainability-linked loans are unlikely to drive significant impact on performance improvements in sustainability issues, and this credit market segment is in the early stages of contract sophistication.

Keywords: Sustainability-linked loans, ESG-linked loans, credit market, ESG risk, KPI types

JEL Classification: M41, G21, Q56