Center for Advancing Accounting

Issuance and Design of Sustainability-Linked Loans

• In Event: Susatinability and Lending Activities

Abstract

Sustainability-linked loans (i.e., syndicated loans for which pricing is linked to a sustainability performance indicator) have rapidly evolved into a significant private debt product. We find that sustainability-linked lending has been available mostly to borrowers with low ESG risk profiles. We show that borrower’s ESG risk is associated with the use of aggregate (e.g., ESG score) rather than granular (e.g., carbon emissions) performance indicators and the monitoring by a reputable sustainability verifier. Further, ESG risk is unrelated to sustainability indicator materiality and target restrictiveness. Overall, we provide evidence consistent with the sustainability-linked lending market acting as a signaling mechanism of ESG credentials and being at the early stages of contract design sophistication.

Authors

• Maria Loumioti, The University of Texas at Dallas

• George Serafeim, Harvard Business School