Banking on Sustainability: Strategic Incentives Behind Sustainability-Linked Loans

Abstract

We examine the strategic incentives that drive banks to introduce Sustainability-Linked Loans (SLLs). Using a comprehensive dataset of lead banks involved in SLL transactions, we find that multinational banks, particularly key players in global syndicated markets, are significantly more likely to offer SLLs compared to domestically focused institutions. While these multinational banks tend to promote SLLs in their home markets, their international strategies target economically significant credit markets where they hold leading positions but are experiencing slowing growth. Taking a prominent role in SLL transactions, especially as a sustainability agent, helps foreign banks strengthen their presence in local syndicated loan markets. This is achieved through retaining relationship borrowers and acquiring new clients, which contributes to increased interest income and lending fees. Our findings highlight the strategic rationale behind banks' adoption of SLLs, emphasizing their role in maintaining a competitive advantage in global lending markets.

Keywords: Syndicated Loans, Sustainability, Banks, Competition, International Finance

JEL Classification: G21, G28, G38