Are sustainability‐linked loans designed to effectively incentivize corporate sustainability? A framework for review

This paper analyzes sustainability‐linked loans (SLLs), a new category of debt instrument that incorporates environmental, social, and governance (ESG) considerations. Using a large sample of loans issued between 2017 and 2022, we assess the design of SLLs by evaluating their key performance indicat...

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Bibliographic Details
Published in:Financial management 2023-12, Vol.52 (4), p.643-675
Main Authors: Auzepy, Alix, Bannier, Christina E, Martin, Fabio
Format: Article
Language:English
Subjects:
Business performance management
Corporate sustainability
Environmental aspects
ESG‐linked loans
Finance
Financial instruments
Governance
Loans
Performance indicators
Securities markets
Social aspects
Stock markets
Sustainability
sustainability KPIs
sustainability‐linked loans
Sustainable development
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Summary:This paper analyzes sustainability‐linked loans (SLLs), a new category of debt instrument that incorporates environmental, social, and governance (ESG) considerations. Using a large sample of loans issued between 2017 and 2022, we assess the design of SLLs by evaluating their key performance indicators (KPIs) using a comprehensive quality score. Our findings suggest that SLLs only partially rely on KPIs that generate credible sustainability incentives. We document that SLL borrowers do not significantly improve their ESG performance post issuance and show that stock markets are rather indifferent to the issuance of SLLs by EU borrowers, while SLL issuance announcements by US borrowers are met with significantly negative abnormal returns by investors. These findings call into question the beneficial sustainability and signaling effects that borrowers may hope to achieve by issuing ESG‐linked debt.
ISSN:1755-053X
0046-3892
1755-053X
DOI:10.1111/fima.12437