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In contrast to other types of sustainable debt instruments – such as green and social bonds and loans – sustainability-linked instruments do not require issuance proceeds to be dedicated to defined projects. Instead, a borrower can apply the label to any type of loan or bond instrument that directly links funding costs to the achievement of predetermined sustainability performance targets (SPTs).

Flexible, accessible and growing

The first sustainability-linked loan (SLL) was issued in 2017 and since then the market has grown impressively. Cumulative SLL issuance surpassed $300bn in 2020, having grown more than six-fold since 2018, to fund a wealth of ESG corporate ambitions.

Most SLLs issued to date have been in the form of revolving credit facilities, which are well suited for general corporate use because they provide a borrower with the ability to periodically draw down and repay the loan when needed. However, a growing number of borrowers are linking sustainability objectives to margin adjustments on drawn term loans which increase accountability for meeting set SPTs.

The rapid increase in SLL issuance has also catalysed the growth of sustainability-linked bonds (SLBs). In September and October 2019, Italian utility Enel S.p.A issued the first two SLBs. This noteworthy innovation in the corporate bond market has encouraged various other participants to follow suit. Like the SLL market, the majority of SLB issuance is currently concentrated in Europe, but it is quickly diversifying.

Because they allow greater flexibility in proceed use, sustainability-linked debt instruments have the potential to dramatically increase the accessibility of sustainable financing. Those without sufficient capital expenditures to issue a green, social, or sustainability bond or loan for sustainability projects, for instance, can still tap the sustainable debt market thanks to these newer instruments.

Furthermore, the sustainability-linked concept is expanding beyond the classic SLL and SLB model into other instrument types. The first sustainability-improvement derivative (SID) was introduced in August 2019. More recently, in March 2021, Japanese construction company Takamatsu issued the first sustainability-linked green bond (SLGB). SLGBs tie the use of proceeds model of a green bond with the performance-based structure of an SLB.

The credibility challenge

While the market’s growth is encouraging, there are challenges for SLL and SLB issuance. There is a distinct risk of "ESG-washing" given that proceed use for these instruments tends to not be identified upon issuance and can be used for any general corporate purpose.

To maintain the growth and credibility of sustainability-linked instruments, therefore, market adoption of the voluntary Sustainability Linked Loan Principles (SLLP) and the Sustainability-Linked Bond Principles (SLBP) is key to ensure SPTs are robust and proceeds are appropriately allocated. New disclosure frameworks, such as the EU Green Taxonomy, could also help accelerate some degree of standardisation of SLLs and SLBs over time.

On the market’s current trajectory, sustainability-linked instruments are likely to be increasingly leveraged to fund innovative technologies, such as those related to carbon capture or hydrogen, as well as to expand into less mature environmental categories, such as climate change adaptation, biodiversity, and water use. A broader range of social and governance KPIs could also proliferate, including those related to diversity and inclusion – particularly as social justice issues continue to dominate social, political, and economic agendas globally.


Hear from Michael Wilkins, senior research fellow, sustainable finance at S&P Global Ratings at Environment Analyst's Global Business Summit on 8-9 June, where Michael will be exploring the global evolution of sustainable debt markets & green finance instruments.

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