The sustainability-linked loan - concept, development, outlook

Since the introduction of the “sustainability-linked loan” (SLL) in April 2017, the market for this lending product has grown
significantly. The SLL is a loan where the interest margin is linked to the sustainability achievements of the borrower. If the
borrower improves its sustainability performance, the margin decreases, and vice versa. This article provides an overview of
the features of the product, currently offered by over 500 banks worldwide, including real-life examples of SLLs. It highlights
market developments (quality standards for SLLs, product diversification, and growth of the syndicated SLL market) and
it discusses how the risks of greenwashing that come with this product can be mitigated. The risks of greenwashing are
high, which means that the parties involved will have to make a greater effort to maintain the integrity of the SLL product.
We conclude with some reflections on the kind of commitment by corporates and banks that is required for keeping up the
integrity of the SLL, a type of loan that is intended to contribute to the goals of the Paris Agreement and the net zero targets
that many companies and banks have stated in public.