What is a Sustainability-Linked Loan?
Sustainability-Linked Loans have become a core instrument in sustainable finance. Here is how they work.
Definition
A Sustainability-Linked Loan (SLL) is a loan or credit facility whose economic terms are linked to the borrower's achievement of predetermined sustainability performance targets. The proceeds can be used for general corporate purposes.
How the pricing link works
The loan agreement defines KPIs and SPTs. If the borrower meets the SPTs in a reporting period, the margin typically steps down; if not, it may step up. The mechanism is agreed between borrower and lenders.
The five core components
The Sustainability-Linked Loan Principles describe five core components:
- Selection of KPIs
- Calibration of SPTs
- Loan characteristics
- Reporting
- Verification
Why verification matters
Because pricing depends on reported performance, independent verification of KPI performance against SPTs, at least annually, is what gives lenders and the market confidence in the instrument.