Are Sustainability-Linked Loans Designed to Effectively Incentivize Corporate Sustainability? A Framework for Review

Financial Management

51 Pages Posted: 11 Dec 2022 Last revised: 27 Sep 2023

See all articles by Alix Auzepy

Alix Auzepy

University of Giessen

Christina E. Bannier

Justus-Liebig-University Giessen

Fabio Martin

University of Giessen - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 28, 2022

Abstract

This paper analyzes sustainability-linked loans (SLLs), a new category of debt instrument that incorporates ESG considerations. Using a large sample of loans issued between 2017 and 2022, we assess the design of SLLs by evaluating their key performance indicators (KPIs) using a comprehensive quality score. Our findings suggest that SLLs only partially rely on KPIs that generate credible sustainability incentives. We document that SLL borrowers do not significantly improve their ESG performance post issuance and show that stock markets are rather indifferent to the issuance of SLLs by EU borrowers, while SLL issuance announcements by US borrowers are met with caution by investors. These findings call into question the beneficial sustainability and signaling effects that borrowers may hope to achieve by issuing ESG-linked debt.

Keywords: Sustainability-Linked Loans, sustainability KPIs, ESG lending, ESG loans, sustainable finance

JEL Classification: G21, G32, M14

Suggested Citation

Auzepy, Alix and Bannier, Christina E. and Martin, Fabio, Are Sustainability-Linked Loans Designed to Effectively Incentivize Corporate Sustainability? A Framework for Review (August 28, 2022). Financial Management, Available at SSRN: https://ssrn.com/abstract=4293774 or http://dx.doi.org/10.2139/ssrn.4293774

Alix Auzepy

University of Giessen ( email )

Licher Str. 64
Giessen, 35394
Germany

Christina E. Bannier

Justus-Liebig-University Giessen ( email )

Licher Str. 62
Gießen, 35394
Germany
+49 641 99 22551 (Phone)

Fabio Martin (Contact Author)

University of Giessen - Department of Finance ( email )

Giessen
Germany

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