The Issuance and Design of Sustainability-linked Loans
71 Pages Posted: 6 Dec 2022
Date Written: November 28, 2022
Sustainability-linked loans (i.e., syndicated loans for which pricing is linked to a sustainability performance indicator) have rapidly evolved into a significant private debt product. We find that sustainability-linked lending has been available mostly to borrowers with low ESG risk profiles. We show that borrower’s ESG risk is associated with the use of aggregate (e.g., ESG score) rather than granular (e.g., carbon emissions) performance indicators and the monitoring by a reputable sustainability verifier. Further, ESG risk is unrelated to sustainability indicator materiality and target restrictiveness. Overall, we provide evidence consistent with the sustainability-linked lending market acting as a signaling mechanism of ESG credentials and being at the early stages of contract design sophistication.
Keywords: Sustainability-linked loans, ESG-linked loans, credit market, ESG risk, KPI types
JEL Classification: M41, G21, Q56
Suggested Citation: Suggested Citation