Download This PaperAre Sustainability-Linked Loans Designed to Effectively Incentivize Corporate Sustainability? A Framework for Review
Center for Financial Studies Working Paper No. 688, 2023
48 Pages Posted: 22 Feb 2023 Last revised: 8 May 2023
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Are Sustainability-Linked Loans Designed to Effectively Incentivize Corporate Sustainability? A Framework for Review
Date Written: May 2, 2023
Abstract
This paper analyzes sustainability-linked loans (SLLs), a new category of debt instruments that incorporates ESG considerations. Using a sample of loans issued from 2017 to 2022, we assess the design of SLLs by analyzing their key performance indicators (KPIs). 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 may be achieved through the issuance of ESG-linked debt.
Keywords: Sustainability-Linked Loans, sustainability KPIs, ESG lending, ESG loans, sustainable finance
JEL Classification: G21, G32, M14
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