From Promise to Practice: A Systematic Review of Sustainability‐Linked Loans

ABSTRACT By linking loan terms to predefined environmental, social and governance (ESG) goals, sustainability‐linked loans (SLLs) can incentivise banks and corporations towards sustainability. Despite rapid growth, research remains scant and questions remain about SLLs' financial, organisational and sustainability impacts and how they differ from other sustainability debt instruments. Accordingly, this article provides a theory‐informed systematic review of the literature on SLLs, interpreting existing research through agency theory, stakeholder theory, neo‐institutional theory and sustainability science. Analysing SLL design, outcomes and policy recommendations through these four perspectives, we show that existing research provides limited evidence that SLLs improve either ESG ratings, financial performance or share prices. We also find evidence of decoupling practices and limited engagement with science‐based sustainability frameworks. We identify research avenues, as well as policy and practical recommendations to structure future research and improve the financial, business and sustainability effectiveness of SLLs.