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Moving the Needle: How Loans and Bonds Are Being Tied to Corporate Sustainability Performance

Posted on August 9, 2021

Aoife McCarthy
Aoife McCarthy
Analyst, Sustainable Finance Solutions Projects

2021 is set to be the year of sustainability-linked debt issuances. The tide continues to rise for the sustainable debt market, with a boom in green, social and sustainability bond issuances globally. Total global sustainable debt issuance in 2020 was valued at US$732 billion,[i] growing 31% over 2019.[ii] As a result, the combined green, social and sustainability debt market reached US$1.7 trillion at the end of 2020.[iii]

The success of sustainability-linked debt instruments has contributed to the steady market growth and increased interest in sustainability-linked loans and bonds. These instruments are attractive options for issuers and borrowers because of the flexibility in the use of proceeds compared to traditional green bonds and loans, making them accessible to a wider selection of industries.

In this article we’ll take a closer look at sustainability-linked debt, what’s driving market adoption and the principles and frameworks guiding market participants.  

What are Sustainability-Linked Loans?

A sustainability-linked loan (SLL) is a type of loan instrument in which the loan terms incentivize the borrower to achieve predetermined sustainability performance targets (SPTs). For example, performance targets may include greenhouse gas (GHG) emission reduction, energy efficiency, or an ESG assessment. The loan characteristics normally include a financial incentive, such as a change in interest rate, linked to sustainability performance targets (SPTs), which are defined and agreed to by the borrower and the lender. Although initially borrowers were not penalized for failing to achieve SPTs, more recent transactions are using a two-way pricing structure in which pricing is reduced if targets are met and increased if missed.[iv]   

Benefits of an SLL

Sustainability-linked loans have become a popular instrument among borrowers as they provide an asset class with broader application. SLLs can be applied by a wider range of borrowers than a conventional green, social or sustainability bond or loan, where borrowers are limited to those with eligible green expenditures and assets. Compared to a more traditional green bond, SLLs can be used for general corporate purposes, allowing the borrower greater flexibility in the use of proceeds.

Another benefit of SLLs is the business material and ambitious sustainability performance targets tied to the loan terms. Borrowers can demonstrate their commitment to improving their corporate sustainability more broadly, thus positively impacting stakeholders and contributing to environmental protections and the transition to a low-carbon economy. Lenders can demonstrate their leadership in financing sustainable economic activities through expanding their sustainable lending portfolio and supporting their own sustainability objectives.    

What are Sustainability-Linked Bonds?

Sustainability-linked bonds (SLB) are similar in nature to SLLs in that they are a forward-looking, performance-based instrument, but have a penalty in the coupon rate if predefined sustainability targets are not met. In the bond market, instruments commonly have a one-time 25 basis point step up if targets aren’t achieved within the specified time frame.

SLBs: The New Kid on the Block

Compared to other forms of sustainable debt, sustainability-linked bonds are relatively new, comprising only a small proportion of the global sustainable finance market. Since the first SLB was issued in late 2019, this instrument has grown in popularity with over US$11 billion in issuance in 2020.[v] Despite their newness, SLBs have attracted issuers from a broad range of sectors, including pharmaceuticals (Novartis), shipping (Seaspan), energy (Enel), luxury apparel (Chanel), and telecommunications (Telus), illustrating the instrument’s accessibility.

Principles and Guidance for Linked Instruments

Financial market associations have developed voluntary guidance and principles to encourage integrity and build credibility within the sustainable debt market. Developed in collaboration and consultation with market participants, the principles mentioned below provide a best practice framework for structuring and launching credible and ambitious linked bonds and loans.

Sustainability-Linked Bond Principles

The International Capital Markets Association (ICMA) published the Sustainability-Linked Bond Principles (SLBP) in June 2020. The SLBPs provide a framework for structuring features, disclosure and reporting for linked bonds and are designed to support market participants in providing the information needed to increase capital allocation to these instruments.

Sustainability-Linked Loan Principles

The Sustainability-Linked Loan Principles (SLLP) provide a voluntary, high-level framework for the issuance of SLLs. They detail the core five components of SLLs that are necessary for the transaction to be viewed as credible by the market. Initially published in 2019, the SLLPs were updated in May 2021 to better align with the SLBP, providing greater clarity on the selection of key performance indicators (KPIs) and the calibration of SPTs.

The Importance of Material and Relevant KPIs and SPTs

As the sustainable debt market has matured, so too have investor expectations of issuers seeking financing. With sustainability-linked debt instruments introducing new industries, and with proceeds used for general corporate purposes instead of explicitly green or social projects, the commitments outlined in sustainability-linked instruments are under more scrutiny.

Given the nature and structure of these instruments, it is essential for issuers, lenders and investors alike to ensure the targets tied to linked bonds and loans are robust and improve an issuer’s sustainability performance as to maintain market credibility.

Under the principles mentioned above, corporate issuers and borrowers must clearly demonstrate that the selected SPTs and the KPIs on which they are based are:

  • relevant and material to their core sustainability and business strategy,
  • address ESG challenges of their industry,
  • are measured based on an externally recognized standard and
  • are benchmarked against historical performance, industry peer performance or science-based targets.

As SLBs and SLLs are forward-looking performance instruments, SPTs and KPIs should go beyond business as usual. At a minimum, issuers need to show improvement compared to their historical performance.

Solutions for SLL Borrowers and SLB Issuers

To support issuers and borrowers, several ESG and sustainability research firms provide second-party opinions to ensure SLLs and SLB frameworks adhere to the relevant principles. Issuers and borrowers would do well to seek out and review published opinions when considering sustainability-linked debt financing.

Learn more about recent developments in global sustainable finance in our new ebook “Financing Sustainability: Recent Trends in Sustainable Bonds, Linked Instruments and Disclosure.” Also, be on the lookout for the next post in our series focusing on Australia’s sustainable debt market and the opportunities linked debt instruments offer to companies and issuers there.




[i] BloombergNEF, (2021), “Sustainability Debt Breaks Annual Record Despite COVID-19 Challenges”, at: 

[ii] Morningstar (2021), “Sustainability-Linked Debt Instruments and their Potential Credit Impact Through Cost of Capital”, at: 380416.pdf (

[iii] Climate Bonds Initiative, (2021), “Sustainable Debt: Global State of the Market 2020” at: 

[iv] ClarkeOsborne (2021). “Sustainability-Linked Loans on the Rise in 2020,” accessed 26.07.21 at:

[v] Bullard, N., (2021). “The Sustainable Debt Market is All Grown Up,” Bloomberg, accessed 26.07.21 at:

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