S
Sustainability-Linked Finance
Definition
Sustainability-linked finance refers to financial instruments (loans, bonds, export credit) whose financial terms — typically the interest rate or coupon — are tied to the borrower’s performance against predefined sustainability KPIs and sustainability performance targets (SPTs). Unlike green bonds (where proceeds are restricted to specific green projects), sustainability-linked instruments impose no use-of-proceeds restrictions; instead, they incentivise overall sustainability performance improvement. Sustainability-Linked Loan Principles (SLLP) and Sustainability-Linked Bond Principles (SLBP) are published by LMA and ICMA respectively.
Source
LMA/APLMA/LSTA Sustainability-Linked Loan Principles (SLLP, 2023 update); ICMA Sustainability-Linked Bond Principles (SLBP, 2023 update); EU GreenBond Standard (EU) 2023/2631.
Practical Explanation (Compliance Context)
Manufacturers and issuers accessing sustainability-linked loans or bonds must select credible, ambitious, and externally verifiable ESG KPIs (e.g., GHG emission intensity reduction, renewable energy percentage, female leadership representation, supplier audit coverage). Financial penalties (margin ratchets) apply if SPTs are not met. Third-party verification of KPI performance is typically required annually. Credible sustainability-linked instruments require robust ESG data infrastructure.