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
There are 2 versions of this paper
Are Sustainability-Linked Loans Designed to Effectively Incentivize Corporate Sustainability? A Framework for Review
Are Sustainability-Linked Loans Designed to Effectively Incentivize Corporate Sustainability? A Framework for Review
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: Suggested Citation