Sustainability-linked loans (SLLs), in which the margin can go up if the borrower hits sustainability targets, and down if it gets worse, seemed a simple enough idea. The incentive, albeit small, meant the company was staking real money on its green commitments.
But in the strange pre-dawn twilight of sustainable finance, where investors and even regulators find it hard to distinguish between what is real and what is image, these loans are generating unforeseen incentives.
Borrowers want to use them to show their stakeholders how green they are. So do some banks. No one is very clear what benefit a bank achieves by making such a loan, but it is generally felt that they will please staff, shareholders, ESG rating agencies and regulators.
At the same time, banks are afraid of being stung. What if a company caused an environmental stink and had to pay a higher margin — would the press attack banks for profiting from disaster?
Banks have shown conscience in wanting to make sure sustainable loans are genuinely stretching. But the product is heading towards a crossroads. The market will have to choose. One way lies the status quo: the market as a catwalk on which companies can flaunt their credentials, if they wish to, and on their own terms — even if their attractions are rated by critics.
The other path leads to top-down imposition of criteria, evenly and rigorously, on all borrowers, in a regimented way. That alone could make SLLs a real tool of risk management.