The Issuance and Design of Sustainability-Linked Loans

Abstract

ABSTRACT We explore the contract design of sustainability-linked loans (SLLs), a rapidly growing form of ESG-labeled debt that ties loan pricing to firms’ sustainability performance. Using a global SLL sample issued between 2017 and 2023, we examine whether SLLs are structured to discipline borrowers with weak ESG performance through stringent sustainability-linked provisions. We find no association between borrower ESG performance and the rigor of SLL provisions, suggesting that SLLs are generally not designed as incentive contracts. Instead, SLL contract design aligns more closely with ESG branding and credit-product-expansion motives: borrowers leverage SLLs to enhance legitimacy and visibility and to attract additional capital, whereas lenders can convey their ESG commitment, cater to investor demand for ESG-labeled debt, and expand their credit product offering. Overall, our evidence suggests that SLLs function primarily as symbolic labels rather than credible mechanisms for driving meaningful improvements in firms’ sustainability outcomes. Data Availability: Data are available from the sources cited in the text. JEL Classifications: M14; M41; G21; G32; Q56.