Who Benefits from Sustainability-linked Loans?

Are Sustainability-Linked Loans Designed to Effectively Incentivize Corporate Sustainability? A Framework for Review

“…Ultimately, this means that issuing SLLs could have little to no significant positive impact on investors' perception or the ESG performance of the borrowers. To this end, our findings might explain why recent studies did not find a positive impact of SLLs on sustainability performance (Du et al (2022), Kim et al (2021)). To avoid that SLLs become an empty ESG showcase, stakeholders involved in the future development of sustainable debt instruments should therefore consider the insights of this study.…”

“…This is in accordance with the the International Accounting Standards Board (IASB) who find that the rate adjustments is relatively small at present ranging between 2.5bps to 10bps but is likely to grow in the future (International Accounting Standards Board 2021). Du et al (2022) find that potential discounts for improved sustainability performance do not seem to provide sufficient economic incentives for borrowers to engage in meaningful changes in their ESG profiles.…”

“…To the extent that general purpose loans are the primary source of debt financing for companies around the world (Kim et al 2021), it is surprising to find that only very few scholars, to the best of our knowledge, have investigated this new form of loan contract. The nascent literature on SLLs has so far primarily focused on stock market reactions to the issuance of SLLs (Kim et al (2021), Carrizosa & Ghosh (2022)), on the development of borrowers' subsequent ESG performance (Özlem Dursun-de Neef et al 2022) and on the benefits that these private debt instruments may have for lenders (Du et al 2022). However, the earlier studies have left a detailed analysis of loan characteristics, particularly of the underlying sustainability KPIs, largely untouched.…”

Are sustainability‐linked loans designed to effectively incentivize corporate sustainability? A framework for review

“…(2023), Carrizosa and Ghosh (2022), Du et al. (2023), Caskey and Chang (2022), Loumioti and Serafeim (2022), and Dursun‐de Neef et al. (2023).…”

“…(2023) and Du et al. (2023) report that SLL borrowers face limited financial penalties for failing to meet their sustainability targets. Although these prior studies have individually explored different aspects of KPI characteristics, our paper stands out as the first attempt to systematically analyze a set of six dimensions (i.e., strategic relevance, materiality, measurability, benchmarking, pricing mechanism, and external review) together in a single framework.…”