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Sustainability-Linked Loans: Growth of the Sustainable Finance Market and Updated Guidance for Lenders and Borrowers

June 28, 2023

A sustainability-linked loan (SLL) is any type of loan instrument structured to incentivize the borrower to achieve ambitious, material and quantifiable predetermined sustainability performance objectives. The SLL market is an ever-growing sector, with nearly C$2-trillion of SLLs outstanding as of year-end 2022. In contrast to green loans, which must be used for a specific purpose, SLLs are agnostic to the use of proceeds. In most instances, SLLs will be used for general corporate purposes while looking to support a borrower in improving its overall sustainability performance.

The general framework of an SLL requires the borrower and lenders to select key performance indicators (KPIs) relevant to the borrower’s business and sustainability goals and agree upon sustainability performance targets (SPTs) calibrated to those KPIs. Failure to meet an SPT will not result in an event of default under the loan agreement but may result in a penalty in the form of increased fees or interest.

SLL Principles

To provide guidance to lenders and borrowers, the Loan Syndications and Trading Association (LSTA), Loan Market Association (LMA) and Asia Pacific Loan Market Association (APLMA) have published a list of SLL Principles (SLLP), which were updated in February 2023. The LSTA, LMA and APLMA state that all loans originated, extended or refinanced after March 9, 2023, should fully align with this version of the SLLP to be best classified as SLLs. The SLLP are organized around the following five core components:

1. Selection of KPIs

Borrower performance is measured using one or more sustainability KPIs. The borrower must clearly define these KPIs. The KPIs must be relevant and material to the borrower’s overall business, operations and sustainability strategy. They must also be measurable or quantifiable on a consistent methodological basis and be able to be benchmarked using external references (i.e., industry or scientifically developed standards) to properly evaluate ambition and success.

2. Calibration of SPTs

SPTs express the level of ambition to which the borrower is committing. It is recommended that an annual SPT should be set for each KPI, for each year of the loan term. SPTs should be set in good faith and should remain ambitious and relevant for as long as they apply through the life of the loan. SPTs should also have clear timelines for the target achievement, including observation dates or periods. When relevant, SPTs should have a verified baseline or reference point selected for improvement of KPIs. Such SPTs should also have a description of the context in which pro-forma adjustments or recalculations of baselines, KPIs and SPTs may take place. Borrowers should outline any key factors beyond their control that may affect achievement of the SPTs.

It goes without saying that SPTs should represent a goal of material improvement in their respective KPIs beyond a “business as usual” trajectory and required regulatory targets. SPTs have generally been based on a combination of benchmark approaches: the borrower’s own performance over time, the performance of the borrower’s peers and reference to the relevant science.

3. Economic Characteristics of the Loan

A key characteristic of SLLs is that achievement of SPTs is linked to an economic outcome. For example, the margins under a loan agreement will often be reduced where the borrower satisfies an SPT as measured by a KPI, or raised where an SPT is not satisfied. Pricing adjustments in SLLs have historically been modest (around +/- 5 basis points) and may or may not be cumulative. Some SLLs feature a no-downside structure (i.e., they reward the borrower for meeting SPTs but do not penalize for failure to do so). Others feature two-way pricing adjustments to include both rewards and penalties.

4. Reporting

Borrowers should, at least once per year, provide lenders with up-to-date information to allow them to monitor the performance and continued suitability of SPTs. A sustainability confirmation statement and verification report should also be provided, outlining the borrower’s performance against the SPTs for the relevant year and the impact of that performance on the loan’s characteristics. To help bolster the credibility of the SLL market, reporting issuer borrowers are encouraged to publicly report information relating to their SPTs.

5. Verification

Borrowers must obtain independent and external verification of their performance level against each SPT for each KPI that lends itself to review. This is a necessary element of the SLLP and should be conducted by a qualified external reviewer with relevant expertise. Such verification must be shared with lenders in a timely manner and, where appropriate, made publicly available.


SLLs are becoming increasingly common in the mid and large corporate lending market. Borrowers and lenders often enjoy a reputational benefit that accompanies the announcement of a new SLL, especially when the SLL is the first or the largest in a particular industry. Borrowing an SLL may render a company eligible for sustainability-related investment opportunities, such as potential inclusion in environmental, social and governance (ESG) indices featuring companies exhibiting social and environmental responsibility practices.

However, companies should ensure that they align their STPs and KPIs with the SLLP. Concerns over greenwashing arise when KPIs are not material, when SPTs are not sufficiently ambitious or meaningful, or when reporting is inaccurate or insufficient. In these regards, the SLLP are drafted to clearly outline processes to be followed to maintain the integrity of SLLs. In particular, the SLLP set out guidelines to ensure that targets are ambitious and meaningful to the borrower’s business and are tied to improved sustainability in relation to predetermined objective benchmarks on specified timelines. Failure to comply with the SLLP may result in an empty exercise and ultimately impact both lender and borrower.

For further information, please contact:

Simon Finch                +1-416-863-2159
Kevin Dowse               +1-416-863-2708

or any other member of our Financial Services group.