Sustainability-Linked Loan: Definition & How to obtain

Introduction: Sustainability-Linked Loans

Sustainable finance is no longer a niche concept—it's reshaping how companies secure capital in 2025. As the demand for corporate environmental and social accountability grows, financial institutions are rewarding companies for embedding sustainability into their business models. One of the most innovative tools in this space is the Sustainability-Linked Loan (SLL). Unlike traditional green loans that fund specific green projects, SLLs tie the cost of borrowing to a company’s overall sustainability performance. In this guide, you'll learn what a sustainability-linked loan is, how it works, its advantages and risks, which institutions offer them, and whether it's right for your business.

What Is a Sustainability-Linked Loan?

A Sustainability-Linked Loan (SLL) is a type of loan that incentivizes borrowers to achieve pre-defined sustainability targets. These targets are typically linked to environmental, social, or governance (ESG) criteria. If the borrower meets or exceeds these targets, they benefit from lower interest rates. If not, the interest rate may increase. Unlike green loans, which require proceeds to be used for specific environmentally friendly projects, SLLs offer more flexibility, as the funds can be used for general corporate purposes.

The key feature of an SLL is the linkage of loan terms to Sustainability Performance Targets (SPTs) that are ambitious, measurable, and material to the borrower’s operations. The Loan Market Association (LMA) provides detailed guidelines and principles for structuring such loans.

How Sustainability-Linked Loans Work

SLLs are structured around a few critical components:

1. Key Performance Indicators (KPIs): These are metrics that reflect the borrower’s ESG performance. Common examples include:

   • CO2 emissions intensity per product or revenue

   • Percentage of renewable energy used

   • Workplace diversity ratios

   • Water consumption per production unit

   • Waste diverted from landfill

2. Sustainability Performance Targets (SPTs): These targets should be material to the borrower’s business, based on credible baseline data, and set at a level that reflects significant improvement. For example, a logistics company might set a target to reduce fleet emissions by 40% over five years.

3. Loan Pricing Adjustments: Loan margins typically shift up or down based on performance against the SPTs, often annually. The adjustment may be modest (e.g., ±10-15 basis points), but the reputational and symbolic value can be significant.

4. Verification and Reporting: Borrowers must regularly report on their KPI progress, and third-party verification (e.g., from sustainability auditors or ESG rating agencies) is strongly encouraged or required. Reports are often made public to enhance transparency and trust.

For standardized guidance, companies refer to the Sustainability-Linked Loan Principles (SLLP) from the LMA.

Benefits for Companies

Sustainability-linked loans offer a range of benefits:

• Financial Incentives: Companies that hit their sustainability targets can secure loans at reduced interest rates.

• Flexibility: Funds can be used for general purposes rather than only green projects.

• ESG Credibility: SLLs demonstrate a company’s commitment to sustainability, strengthening investor and stakeholder trust.

• Strategic Alignment: The loan encourages companies to embed sustainability deeper into their business model.

• Reputation Boost: Being linked to verified ESG goals enhances a company’s public image.

• Long-Term Value Creation: Companies that integrate sustainability into operations often see better risk management, innovation, and long-term resilience.

Risks and Challenges

While the upside is clear, there are challenges to consider:

• Greenwashing Risks: Companies might be accused of setting weak or irrelevant KPIs to benefit from favorable loan terms without making real changes.

• Complexity: Structuring a credible SLL requires robust data, careful KPI selection, and external assurance.

• Reputational Damage: Failing to meet SPTs can attract scrutiny, especially if a company has heavily marketed its sustainability agenda.

• Increased Costs: The need for third-party verification and regular reporting can add costs and administrative burden.

• Regulatory Uncertainty: As ESG regulations evolve, companies must ensure compliance with local and international standards.

Who Offers Sustainability-Linked Loans?

Many leading financial institutions now offer SLLs as part of their sustainable finance offerings. These include:

• HSBC – A pioneer in sustainable finance, offering SLLs across sectors.

• ING – Known for early innovations in linking corporate loans to sustainability metrics.

• BNP Paribas – Offers tailored SLL structures across Europe and emerging markets.

• Rabobank – Focuses on agriculture and food sector sustainability.

• Société Générale – Provides advisory and structuring support for SLLs.

• Standard Chartered, ABN AMRO, Barclays, UniCredit – All actively participate in the SLL market.

Additionally, development banks and multilaterals like the International Finance Corporation (IFC) and European Investment Bank (EIB) are starting to support similar performance-linked lending structures in developing economies.

Real-World Examples of SLLs

Danone secured a landmark multi-billion-euro credit facility in 2018 tied to its ESG performance. KPIs included reducing greenhouse gas emissions, improving water efficiency, and achieving B Corp certification across its subsidiaries. The loan structure provided financial incentives for meeting these goals, reinforcing Danone's image as a sustainability leader.

Philips signed a €1 billion sustainability-linked loan, tying pricing to its progress on becoming a circular economy pioneer and achieving CO2 emission reductions. The deal attracted widespread praise for integrating business strategy with financing.

Heineken arranged a €3.5 billion revolving credit facility where interest rates were adjusted based on sustainability metrics such as emissions, water usage, and sourcing of raw materials. This helped Heineken align its operational targets with financial performance, sending a strong signal to investors and the public.

How to Secure a Sustainability-Linked Loan

Securing an SLL typically involves the following expanded steps:

1. Assess Your ESG Maturity: Begin with a detailed internal audit or external scan (such as the Regreener Sustainability Scan) to evaluate your environmental and social performance. This provides a baseline for goal-setting.

2. Select Material KPIs: Choose 2-5 ESG metrics that are both material to your sector and measurable. For example, a manufacturer might focus on energy efficiency and waste reduction, while a logistics firm may track transport emissions.

3. Set Ambitious Yet Achievable SPTs: Work with internal teams and external consultants to define forward-looking targets that align with your sustainability strategy. Avoid vague or minimal-improvement targets to maintain credibility.

4. Engage with Lenders Early: Approach a financial institution with experience in SLLs and discuss your goals, data availability, and preferred terms. Lenders often provide input on KPI relevance and benchmarking.

5. Define the Pricing Mechanism: Work with your lender to outline how interest rates will change based on your performance against SPTs. This typically includes a grace period and annual adjustment points.

6. Ensure Independent Verification: Select a trusted third party to verify your ESG performance annually. Institutions such as SGS, Bureau Veritas, or DNV often offer such services.

7. Report Transparently: Commit to regular, preferably public, sustainability reporting. Use recognized frameworks like GRI, SASB, or TCFD for consistency.

8. Monitor and Adjust: Use ESG data platforms or dashboards to continuously monitor progress. Periodically review your SPTs in light of business changes or emerging risks.

Sustainability-Linked Loans vs Green Loans vs Green Bonds

Bonus: Common Questions About Sustainability-Linked Loans

Can SMEs access sustainability-linked loans? Yes, though most SLLs today are issued by mid-to-large companies, smaller firms can participate if they have strong ESG data and support from lenders or advisors.

How is interest margin adjustment calculated? It varies by loan, but adjustments typically range from 5 to 25 basis points depending on whether the borrower meets SPTs. The change is often applied annually.

Can targets change during the loan period? Generally no—SPTs are fixed at origination. However, they may be revisited if there are material changes to the company’s business or external environment, subject to lender agreement.

What makes a KPI credible? KPIs should be industry-relevant, supported by historical data, independently verifiable, and aligned with recognized standards like SBTi or GRI.

Conclusion

Sustainability-linked loans are a powerful tool for aligning financial incentives with environmental and social progress. By tying loan pricing to real, measurable ESG outcomes, these instruments offer companies a flexible yet accountable way to finance their growth. Whether you’re aiming to reduce carbon emissions, improve diversity, or boost energy efficiency, an SLL can help you achieve those goals while enhancing your brand and reducing borrowing costs.

Ready to explore whether a sustainability-linked loan is right for your business? Start by booking a free sustainability scan with Regreener and take the first step toward ESG-aligned financing today.