Are 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

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: 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

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 (May 2, 2023). Center for Financial Studies Working Paper No. 688, 2023, Available at SSRN: https://ssrn.com/abstract=4361732 or http://dx.doi.org/10.2139/ssrn.4361732

Alix Auzepy

University of Giessen ( email )

Licher Str. 64
Giessen, 35394
Germany

Christina E. Bannier (Contact Author)

Justus-Liebig-University Giessen ( email )

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

Fabio Martin

University of Giessen - Department of Finance ( email )

Giessen
Germany

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