The Issuance and Design of Sustainability-linked Loans

62 Pages Posted: 6 Dec 2022 Last revised: 6 Feb 2024

See all articles by Aleksander A. Aleszczyk

Aleksander A. Aleszczyk

New York University (NYU) - Leonard N. Stern School of Business; London Business School

Maria Loumioti

The University of Texas at Dallas

George Serafeim

Harvard Business School

Date Written: November 28, 2022

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

Suggested Citation

Aleszczyk, Aleksander and Loumioti, Maria and Serafeim, George, The Issuance and Design of Sustainability-linked Loans (November 28, 2022). Available at SSRN: https://ssrn.com/abstract=4287295 or http://dx.doi.org/10.2139/ssrn.4287295

Aleksander Aleszczyk

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Maria Loumioti (Contact Author)

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

George Serafeim

Harvard Business School ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=15705

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,015
Abstract Views
4,624
Rank
14,921
PlumX Metrics