Sustainable finance: sustainability-linked loan

Sustainable finance is financial decision-making and investments incorporating environmental, social, and governance (ESG) factors of companies and financial institutions to support sustainable economic growth, mitigate climate risks, and foster social equity (Organisation for Economic Co-operation and Development, 2024). To promote sustainable finance within the financial industry, especially in lending activities, new products have been developed to suit borrowers’ needs. Among the financial instruments designed to address environmental and social challenges are sustainability-linked loans (SLLs). Sustainability-linked loans provide businesses with the necessary financial support to achieve sustainability goals while fostering positive ecological outcomes. SLLs are financial products where the terms and conditions of the loan are linked to the borrower’s achievement of predetermined ESG targets, known as sustainability performance targets. These targets include key performance indicators (financial), external ratings, or equivalent metrics used to measure improvements in the borrower’s sustainability profile. Examples of the sustainability performance target categories include energy efficiency, greenhouse gas emissions, renewable energy, water consumption, biodiversity etc. The sustainability-linked loans can take the form of any loan instrument, including guarantee facilities or letters of credit (Loan Market Association, Asia Pacific Loan Market Association, & Loan Syndications & Trading Association, 2019). The sustainability-linked loan principles (SLLP) were developed to easily adopt SLLs in the financial industry. These principles provide guidelines on the fundamental characteristics of SLLs. SLLP has established a framework for SLL characteristics based on four components: target setting, reporting, evaluation, and relationship to the borrower's broader CSR strategy. (Loan Market Association, Asia Pacific Loan Market Association, & Loan Syndications & Trading Association, 2019). The most distinctive feature of SLLs is that the use of loan proceeds is not restricted to specific projects but supports the borrower’s overall business operations. This flexibility makes them particularly attractive to companies committed to integrating ESG factors into their business strategy, regardless of the industry sector.