What borrowers and lenders need to know as sustainability-linked loans become more popular

Out-Law Analysis | 22 Nov 2022 | 4:30 pm | 4 min. read

The number of companies using sustainability-linked loans for their corporate borrowing is rising. Borrowers and lenders want ESG elements to be documented as part of their loans. Success depends on choosing the right key performance indicators and sustainability-related performance targets.

In the near future, it is hard to imagine facility agreements based on documents and guidelines of the Loan Market Association (LMA) being signed without having ESG linkage - irrespective of whether the loan is classified as green, social or sustainability-linked. Momentum for companies to address universal challenges such as climate change, social inclusion and sustainable development is ever increasing, and regulators are bringing more pressure to bear on corporates and financial institutions.

Sustainability-linked loans

A development of the sustainable financing market is the use of sustainability-linked loans (SLL). SLLs aim to facilitate and support environmentally and socially sustainable economic activity and growth – driving change beyond ‘business as usual’ over the term of the loan. An SLL incentivises the corporate borrower to improve its sustainability performance by achieving sustainability related performance targets (SPTs), as measured by key performance indicators (KPIs).

Each SPT is calibrated for each KPI on signing of the loan facility, and the pricing of interest to be paid is tied to the meeting of those targets. Other costs such as premium reductions for export credit agency financings can be included. SLLs seek to spur meaningful environmental and social change, demonstrating the company’s commitment to sustainability.

Morton Anthony

Anthony Morton


Unlike green or social loans that earmark funds for specific sustainability projects, companies have the flexibility to apply an SLL to general corporate purposes.

The SLL is designed to improve the borrower’s sustainability profile over the term of the loan. For borrowers, the SLL is not pricing driven, as for them the upside is a better ESG profile by meeting SPTs and having its success benchmarked in terms of reputation and credibility rather than seeking cheaper margin pricing.

Any type of loan financing can be used as an SLL. Unlike green or social loans that earmark funds for specific sustainability projects, companies have the flexibility to apply an SLL to general corporate purposes. Sustainability-linked loans are as stated any type of loan instruments or contingent facilities, such as bonding lines, guarantee lines or letters of credit, which incentivise the borrower’s achievement of ambitious, predetermined sustainability performance objectives.

Failing to meet the SPTs and KPIs typically may not constitute an event of default. The Sustainability-Linked Loan Principles (SLLP) developed by the Asia Pacific Loan Market Association, Loan Market Association and the Loan Syndications and Trading Associationstates that "there is currently no established market standard in relation to what will constitute a 'sustainability' breach and this should  be clearly documented in the facility agreement in respect of each deal". The SLLP provide a high-level broad framework to provide guidance on market expectations when issuing SLLs. They contain 5 core components of SLLs that are necessary for the integrity of the SLL market: the selection of KPIs, the calibration of SPTs, loan characteristics, reporting and verification.

Key Performance Indicators

KPIs need to be ambitious and material. Given the SLL’s intention to incentivise corporate sustainability improvements, the selection of the relevant KPIs and the calibration of ambitious SPTs are crucial to the effectiveness and credibility of the SLL and the need to prevent accusations of greenwashing. The SLLP require that KPIs are "relevant, core and material to the borrower's overall business, and of high strategic significance to the borrower's current and/or future operations". For longer dated transactions or transactions subject to extension options, where not all SPTs can be accurately set at the outset of the loan, or where certain KPIs and SPTs may cease to be relevant over time, the parties should document the precise conditions to allow updating KPI and SPT calibration to maintain alignment with its sustainability commitment over the life of the loan.

There is a wide spectrum of KPIs. The use of generic, non-material KPIs should not be tolerated in the SLL market and the choice of KPIs needs to be undertaken on a transaction-to-transaction basis. KPIs and SPTs should be bespoke to the relevant borrower. A case-by-case approach is fundamental to the integrity of the SLL product. However, the following KPIs are frequently used in SLLs:

  • reduction of Co2 or greenhouse gas emissions
  • increased use of Renewables
  • diversity targets
  • reduction of accidents in the workplace

Sustainability coordinator and ESG consultant

One or several sustainability coordinators are often appointed to assist, among other things, with negotiating KPIs between the lending group and the borrower. The sustainability coordinator may help to identify the most relevant core and material KPIs for that specific industry sector and the related SPTs and negotiate. He can also liaise with external reviewers in relation to the choice of the KPIs and calibration of SPTs.

The sustainability coordinator usually acts on a non-reliance basis. Therefore it is up to each lender to carry out its own assessment of the relevant KPIs as to credit and sustainability requirements. Some banks are keen to take on this role, other banks are more cautious regarding taking on this role or being associated with the review and blessing of ESG data.

The borrower may also appoint an ESG consultant to assist its sustainability strategy or to identify those KPIs that are relevant, core and material to its business activities. A second party opinion can offer an objective opinion on the materiality of the KPIs selected.


There are not yet any standard ways of reporting on STPs, meaning reporting is likely to be decided on a loan-by-loan basis. Borrowers should report on their SPTs at least annually. They are encouraged to provide details of underlying methodology and assumptions and confirm that there has been no change in the calculation. Public reporting is encouraged.

The SLLP guidance notes mention that "there are several sustainability reporting methodologies in the market today. These include the Global Reporting Initiative’s Sustainability Reporting Standards, which provide widely adopted global standards for sustainability reporting".

Post-signing verification of KPIs and SPTs

The SLLP states that borrowers must obtain independent and external verification of the borrower’s performance level against SPT and for each KPI at least once a year. It is recommended that the verification of performance against SPTs is made publicly available where appropriate. As opposed to the pre-signing external review such as a second party opinion, which is recommended, the post signing verification is a necessary element of the SLLP. It is recommended that the verification of performance against the SPTs should  also be made publicly available.
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