Abstract
This dissertation critically examines whether sustainability-linked loans (SLLs) represent genuine instruments for corporate decarbonisation or primarily function as relabelling mechanisms within the burgeoning green finance landscape. Employing a systematic literature synthesis methodology, this study analyses empirical evidence from peer-reviewed sources published between 2017 and 2025, evaluating the design quality, measured environmental outcomes, and greenwashing risks associated with SLLs. The findings reveal that whilst SLLs theoretically possess the capacity to incentivise meaningful emissions reductions, their practical implementation demonstrates significant shortcomings. Most SLL contracts fail to incorporate credible key performance indicators characterised by materiality, ambition, and independent verification. Margin adjustments typically range from merely 2 to 25 basis points, providing insufficient financial pressure for substantive behavioural change. Critically, empirical studies indicate no significant improvement in borrowers’ environmental, social, and governance performance following SLL issuance. The evidence suggests that SLLs predominantly serve signalling purposes for firms with pre-existing strong environmental credentials rather than transforming high-emitting laggards. This dissertation concludes that without strengthened regulatory frameworks, standardised taxonomies, and mandatory sector-specific performance indicators, SLLs will continue to represent symbolic rather than substantive contributions to the net-zero transition.
Introduction
The global financial system faces unprecedented pressure to facilitate the transition towards a low-carbon economy. Following the Paris Agreement’s commitment to limiting global temperature increases to 1.5 degrees Celsius above pre-industrial levels, financial institutions, corporations, and regulators have increasingly recognised sustainable finance as essential for achieving climate objectives (United Nations Framework Convention on Climate Change, 2015). Within this context, sustainability-linked loans have emerged as a prominent instrument purportedly designed to align corporate borrowing with environmental, social, and governance objectives.
Sustainability-linked loans represent a category of debt instruments where the financial terms, typically the interest rate margin, are linked to the borrower’s achievement of predetermined sustainability performance targets. Unlike green bonds or green loans, which finance specific environmentally beneficial projects, SLLs provide general corporate finance with sustainability incentives embedded through margin adjustments tied to key performance indicators (Loan Market Association, 2023). The global SLL market has experienced remarkable growth, expanding from approximately $5 billion in 2017 to over $700 billion in cumulative issuance by 2023, reflecting heightened corporate and investor interest in sustainability-linked financing mechanisms.
However, this rapid market expansion has prompted fundamental questions regarding the substantive environmental impact of these instruments. Critics argue that the flexibility inherent in SLL structures creates opportunities for greenwashing, whereby corporations may secure favourable financing terms and reputational benefits without delivering commensurate environmental improvements (Gilchrist, Yu and Zhong, 2021). The concern is that SLLs may function primarily as relabelling exercises, allowing borrowers to rebrand conventional financing as sustainable without materially altering their environmental trajectories.
This debate carries significant implications for climate policy, corporate governance, and financial regulation. If SLLs genuinely incentivise emissions reductions and improved environmental performance, they represent a valuable market-based mechanism for accelerating the net-zero transition. Conversely, if they predominantly serve signalling and marketing purposes, they risk diverting attention and resources from more effective decarbonisation strategies whilst potentially undermining confidence in sustainable finance more broadly.
The academic significance of this enquiry extends beyond environmental considerations to encompass fundamental questions about the efficacy of market-based sustainability mechanisms, the role of financial incentives in corporate behaviour change, and the appropriate regulatory architecture for sustainable finance. Practically, understanding the real-world impacts of SLLs informs investment decisions, lending practices, corporate sustainability strategies, and policy development across multiple jurisdictions.
This dissertation addresses the central research question of whether sustainability-linked loans drive real emissions reductions or primarily represent relabelling of conventional financing. Through systematic analysis of the emerging empirical literature, this study evaluates the design characteristics, measured outcomes, and structural limitations of SLLs to provide an evidence-based assessment of their contribution to genuine sustainability improvements.
Aim and objectives
Main aim
The primary aim of this dissertation is to critically evaluate whether sustainability-linked loans deliver genuine emissions reductions and environmental, social, and governance improvements or predominantly function as relabelling mechanisms with limited substantive sustainability impact.
Research objectives
To achieve this aim, the following specific objectives have been established:
1. To analyse the design characteristics of sustainability-linked loan contracts, examining the quality and credibility of key performance indicators, the magnitude of financial incentives, and the verification mechanisms employed.
2. To synthesise empirical evidence regarding the measured environmental and ESG outcomes following SLL issuance, comparing these outcomes with alternative green finance instruments.
3. To evaluate the greenwashing and relabelling risks associated with current SLL market practices, identifying structural vulnerabilities that may undermine sustainability objectives.
4. To assess the regulatory and policy frameworks governing SLLs, examining proposals for strengthening their effectiveness as genuine transition finance instruments.
5. To develop evidence-based conclusions regarding the conditions under which SLLs may contribute to meaningful sustainability improvements and the reforms necessary to enhance their credibility and impact.
Methodology
This dissertation employs a systematic literature synthesis methodology to address the research objectives. Given the nascent and rapidly evolving nature of the sustainability-linked loan market, this approach enables comprehensive analysis of the emerging empirical evidence whilst accommodating the methodological diversity characterising current research in this field.
Research approach
The study adopts an interpretive epistemological stance, recognising that understanding the sustainability impacts of financial instruments requires careful interpretation of diverse evidence sources, theoretical frameworks, and analytical approaches. The research design follows a qualitative synthesis methodology, systematically identifying, evaluating, and integrating findings from multiple primary studies to generate comprehensive insights exceeding those available from individual sources.
Literature identification and selection
The literature search strategy employed multiple academic databases, including Scopus, Web of Science, JSTOR, and SSRN, using search terms encompassing “sustainability-linked loans,” “green loans,” “ESG-linked debt,” “sustainable finance,” and “green finance” in combination with terms relating to environmental outcomes, emissions reductions, and greenwashing. The search was restricted to publications from 2017 onwards, corresponding to the emergence of the SLL market, through to early 2025.
Selection criteria required sources to be peer-reviewed journal articles, working papers from established research networks, or official publications from recognised regulatory bodies and international organisations. Grey literature from reputable sources, including the Loan Market Association, European Commission, and central banks, was included where relevant to understanding market practices and regulatory developments. Sources were excluded if they lacked empirical content, focused exclusively on pricing mechanisms without addressing sustainability outcomes, or originated from non-academic sources without verifiable institutional credibility.
Analytical framework
The synthesis employed a thematic analysis framework, organising findings according to three primary dimensions: design quality and incentive structures; measured environmental and ESG outcomes; and greenwashing and relabelling risks. Within each thematic category, evidence was evaluated according to methodological rigour, sample characteristics, temporal coverage, and consistency of findings across studies.
Critical appraisal of individual studies considered sample sizes, potential selection biases, outcome measurement approaches, and the treatment of confounding variables. Where studies reached divergent conclusions, the synthesis examined potential explanations including differences in sample composition, temporal coverage, geographical focus, and analytical methodology.
Limitations
Several methodological limitations warrant acknowledgement. The SLL market remains relatively young, constraining the availability of longitudinal studies capable of capturing medium and long-term sustainability impacts. Many empirical studies rely on disclosed ESG ratings and reported emissions data, which may themselves be subject to measurement inconsistencies and reporting biases. Publication bias may favour studies identifying significant effects, potentially underrepresenting null findings. Additionally, the rapid evolution of market practices and regulatory frameworks means that findings from earlier periods may not fully reflect current conditions.
Literature review
The emergence and structure of sustainability-linked loans
Sustainability-linked loans emerged in 2017 as an innovative addition to the sustainable finance toolkit, offering a mechanism for linking corporate borrowing costs to sustainability performance. Unlike use-of-proceeds instruments such as green bonds, which require allocation of funds to specific environmental projects, SLLs provide general-purpose financing with interest rate adjustments contingent upon achievement of predetermined sustainability targets (Loan Market Association, 2023). This structural flexibility has contributed to rapid market adoption, with SLLs comprising an increasingly significant share of the broader sustainable lending market.
The Sustainability-Linked Loan Principles, published by the Loan Market Association, Asia Pacific Loan Market Association, and Loan Syndications and Trading Association, establish voluntary guidelines for SLL market practices. These principles specify that sustainability performance targets should be ambitious, meaningful to the borrower’s business, measurable, and subject to verification by qualified external parties. However, the voluntary nature of these principles and their relatively broad formulation have permitted considerable heterogeneity in implementation practices (Gilchrist, Yu and Zhong, 2021).
Design quality and incentive mechanisms
A substantial body of research has examined the design characteristics of SLL contracts, revealing significant concerns regarding the credibility of sustainability performance targets. Auzepy, Bannier and Martin (2023) conducted a comprehensive review of SLL contracts issued between 2017 and 2022, evaluating KPIs against criteria including materiality, ambition, and external verification. Their analysis concludes that most loans fail basic requirements for credible KPIs and thus “only partially” generate real sustainability incentives. This finding suggests fundamental weaknesses in the translation of SLL structural design into meaningful performance incentives.
The quality of KPIs demonstrates notable variation across borrowers. Auzepy, Bannier and Martin (2023) observe that KPI quality is better when firms already possess strong ESG performance, indicating that SLLs may function more effectively as signalling mechanisms for environmentally committed firms than as transformation tools for high-emitting laggards. This pattern suggests adverse selection dynamics whereby firms with limited genuine sustainability ambitions may disproportionately exploit the flexibility of SLL structures to secure favourable financing terms without commensurate performance commitments.
The magnitude of financial incentives embedded within SLLs has attracted considerable scrutiny. Typical margin adjustments range from 2 to 25 basis points, representing a relatively modest proportion of overall borrowing costs (Pop and Atanasov, 2023; Auzepy, Bannier and Martin, 2023; Flottmann et al., 2025). Critics argue that such limited financial stakes provide insufficient incentive for substantive behavioural change, particularly for capital-intensive decarbonisation investments that may require significant upfront expenditure. The symmetrical structure of many SLL margin adjustments, incorporating both step-ups for missed targets and step-downs for achieved targets, further dilutes the net financial impact whilst potentially rewarding achievement of targets that would have been met regardless of the SLL structure.
Measured environmental and ESG outcomes
Empirical evidence regarding the post-issuance sustainability outcomes of SLLs presents a concerning picture. Auzepy, Bannier and Martin (2023) find that borrowers’ ESG performance does not significantly improve following SLL issuance, suggesting that these instruments fail to deliver the environmental improvements their sustainability framing implies. This finding is corroborated by the systematic review conducted by Flottmann et al. (2025), which identifies mixed and generally weak evidence that SLLs deliver issuer-level ESG improvements.
Comparative analysis between different sustainable loan categories yields nuanced insights. Neef, Ongena and Tsonkova (2022) distinguish between “green loans” with specific use-of-proceeds requirements and broader “sustainable loans” encompassing SLLs and similar instruments. Their analysis indicates that green loans are associated with reduced emissions but weaker social scores, whilst sustainable loans demonstrate improvements in environmental and governance scores overall. This differentiation suggests that the structural characteristics of sustainable finance instruments materially influence their sustainability outcomes, with use-of-proceeds restrictions potentially generating stronger environmental discipline.
Hoang et al. (2025) provide evidence that green loans specifically are associated with lower carbon dioxide emissions per revenue and modest profitability gains, indicating potential for well-designed green finance instruments to generate real environmental improvements alongside financial benefits. However, their analysis focuses on green loans rather than SLLs specifically, and the signalling and impact investing effects they identify may not translate to sustainability-linked structures with different incentive mechanisms.
The systematic literature review by Flottmann et al. (2025) highlights a notable gap in the existing research landscape: many studies of sustainability-linked debt focus primarily on pricing mechanisms and stock market reactions rather than substantive environmental outcomes. This emphasis reflects data availability constraints and the relative ease of analysing market responses compared to measuring genuine sustainability impacts, but it limits the evidence base for evaluating the environmental effectiveness of SLLs.
Greenwashing and relabelling concerns
The widespread use of low-quality KPIs and modest financial incentives raises substantial greenwashing concerns. Gilchrist, Yu and Zhong (2021) identify fundamental limitations in green finance instruments, including SLLs, arguing that current market practices frequently fail to ensure genuine environmental additionality. Their survey of the literature concludes that the absence of robust standards and verification mechanisms creates opportunities for cosmetic sustainability labelling without substantive environmental commitment.
Vulturius, Maltais and Forsbacka (2022) extend these concerns to the related sustainability-linked bond market, arguing that similar structural vulnerabilities undermine the credibility of performance-linked sustainable debt instruments. They contend that the absence of mandatory science-based targets, standardised performance metrics, and independent verification requirements permits borrowers to select targets that would likely be achieved regardless of the sustainability-linked structure, thereby securing reputational and potential financial benefits without delivering incremental environmental improvements.
The relabelling dynamic represents a particularly concerning possibility: that SLLs may primarily function to rebrand conventional corporate finance as sustainable without materially altering borrowers’ environmental trajectories. This risk is heightened by information asymmetries between borrowers, lenders, and external stakeholders regarding the stringency and additionality of sustainability performance targets. Without standardised benchmarks and transparent verification, market participants may struggle to distinguish between ambitious SLLs generating genuine sustainability improvements and those representing mere relabelling of business-as-usual financing.
Regulatory and policy frameworks
Recognition of these structural vulnerabilities has prompted regulatory attention and policy proposals for strengthening SLL frameworks. Casalini (2025) analyses the regulatory landscape for green loans and mortgages within the European Union, arguing that harmonisation of sustainability standards across real estate and broader corporate lending is essential for ensuring green finance instruments deliver genuine environmental benefits. The EU Taxonomy Regulation represents a significant step towards establishing common definitions and thresholds for sustainable economic activities, though its application to SLLs remains incomplete.
Valerievna and Igorevna (2024) examine sustainable financing as a factor influencing eco-friendly business transformation, identifying existing challenges and potential solutions. Their analysis emphasises that effective sustainable finance requires stronger regulation, common taxonomies, and mandatory sector-specific KPIs to avoid relabelling and establish SLLs as credible transition tools. Without such strengthening, they argue, sustainable finance risks becoming primarily a marketing and investor relations exercise rather than a driver of genuine environmental improvement.
Policy proposals for enhancing SLL credibility typically encompass several elements: mandatory alignment of targets with science-based pathways; standardised sector-specific KPIs reflecting material sustainability issues; independent third-party verification of baseline performance and target achievement; enhanced disclosure requirements enabling stakeholder scrutiny; and strengthened enforcement mechanisms for instances of misleading sustainability claims. The implementation of such reforms faces challenges including the cross-border nature of loan markets, the private character of many loan transactions, and resistance from market participants benefiting from current flexibility.
Discussion
The evidence synthesised in this dissertation presents a sobering assessment of sustainability-linked loans’ contribution to genuine emissions reductions and ESG improvements. Whilst these instruments have attracted substantial market enthusiasm and corporate adoption, their practical effectiveness in driving meaningful sustainability outcomes appears highly limited and contingent upon design characteristics that remain insufficiently prevalent in current market practice.
Evaluation of design effectiveness
The first research objective concerned analysis of SLL design characteristics. The evidence demonstrates that most SLL contracts fail to incorporate key performance indicators meeting basic credibility requirements. The finding by Auzepy, Bannier and Martin (2023) that loans only partially generate real sustainability incentives reflects fundamental weaknesses in the translation of SLL structural design into meaningful performance pressures.
The typical margin adjustment range of 2 to 25 basis points represents a material limitation on SLL effectiveness. For a borrower considering substantial capital expenditure for emissions reduction, such modest savings provide minimal financial incentive relative to the investment required. The symmetrical structure of margin adjustments further diminishes net impact, as step-downs for achieved targets may reward performance that would have occurred regardless of SLL involvement. This structural characteristic undermines the additionality that should distinguish genuine sustainable finance from relabelled conventional lending.
The observation that KPI quality correlates positively with pre-existing ESG performance carries significant implications for understanding SLL market dynamics. Rather than functioning as transformation tools driving improvement among high-emitting borrowers with substantial scope for environmental progress, SLLs appear to serve primarily as signalling devices for environmentally committed firms seeking to communicate their sustainability credentials to stakeholders. This pattern suggests adverse selection dynamics whereby the firms most requiring incentives for behavioural change may be least likely to accept stringent SLL terms, whilst firms already on strong sustainability trajectories may disproportionately access these instruments.
Assessment of measured outcomes
The second objective addressed synthesis of empirical evidence regarding post-issuance outcomes. The finding that borrowers’ ESG performance does not significantly improve following SLL issuance represents the most concerning conclusion from the evidence reviewed. If SLLs genuinely incentivised sustainability improvements, one would expect detectable performance gains following issuance, yet the empirical literature fails to identify such effects at statistically significant levels.
The comparative outcomes between different sustainable loan categories provide instructive insights. The evidence that green loans with specific use-of-proceeds requirements are associated with reduced emissions whilst broader sustainability-linked instruments show weaker environmental effects suggests that structural discipline matters for sustainability outcomes. Use-of-proceeds restrictions create direct links between financing and environmental projects, whereas performance-linked mechanisms depend upon the quality and ambition of selected targets, which the evidence indicates are frequently inadequate.
The gap in existing research identified by Flottmann et al. (2025), whereby studies predominantly focus on pricing and market reactions rather than environmental outcomes, reflects broader challenges in sustainable finance research. Market reactions may provide misleading signals regarding genuine sustainability value if investors lack information to distinguish between credible and superficial sustainability commitments. The emphasis on pricing mechanisms in academic research may inadvertently reinforce market practices prioritising financial optimisation over environmental effectiveness.
Greenwashing risk evaluation
The third objective concerned evaluation of greenwashing and relabelling risks. The evidence strongly supports the proposition that current SLL market practices carry substantial greenwashing risks. The combination of low-quality KPIs, modest financial incentives, limited independent verification, and inadequate disclosure creates conditions highly conducive to cosmetic sustainability labelling without substantive environmental commitment.
The relabelling dynamic represents a particularly problematic possibility with implications extending beyond individual transactions. If SLLs become widely perceived as greenwashing vehicles, confidence in sustainable finance more broadly may be undermined, potentially reducing the effectiveness of instruments with genuine environmental value. Market participants and regulators must therefore consider not only the immediate impacts of current SLL practices but also their implications for the credibility and development of sustainable finance markets.
The information asymmetries characterising SLL transactions exacerbate greenwashing risks. Borrowers possess superior knowledge regarding the stringency and additionality of selected targets, the probability of achievement under business-as-usual scenarios, and the genuine environmental implications of KPI selection. Lenders, particularly in syndicated loan structures, may lack the sector-specific expertise or due diligence resources to evaluate target credibility critically. External stakeholders, including investors, customers, and civil society organisations, typically have even more limited access to transaction details and assessment capability.
Regulatory and policy implications
The fourth objective addressed regulatory and policy frameworks. The evidence indicates that voluntary principles have proven insufficient to ensure SLL market practices deliver genuine sustainability improvements. The Sustainability-Linked Loan Principles provide useful guidance but lack the mandatory force, standardised requirements, and enforcement mechanisms necessary to prevent exploitation of structural flexibility for greenwashing purposes.
Proposals for strengthened regulation, including mandatory science-based targets, sector-specific KPI requirements, enhanced verification, and improved disclosure, address many identified weaknesses. However, implementation faces significant practical challenges. The private nature of loan transactions limits transparency compared to public bond markets. The cross-border character of corporate lending creates jurisdictional complexities for regulation. The diversity of borrower sectors and sustainability issues complicates standardisation of appropriate KPIs.
The European Union’s sustainable finance regulatory agenda, including the Taxonomy Regulation and related initiatives, represents the most ambitious attempt to establish comprehensive sustainable finance standards. Extension of these frameworks to encompass sustainability-linked lending more comprehensively could significantly enhance SLL credibility, though effective implementation will require substantial regulatory capacity and international coordination to prevent regulatory arbitrage.
Conditions for effective sustainability-linked lending
Synthesising the evidence, several conditions appear necessary for SLLs to generate genuine sustainability improvements. First, KPIs must address material sustainability issues for the borrower’s sector and operations, avoiding selection of peripheral metrics with limited environmental significance. Second, targets must demonstrate genuine ambition, representing performance improvements beyond business-as-usual trajectories and aligned with science-based pathways where applicable. Third, independent verification of baseline performance and target achievement is essential to prevent gaming and ensure accountability. Fourth, margin adjustments must be sufficiently substantial to create meaningful financial pressure, particularly asymmetric structures penalising missed targets more heavily than rewarding achievements. Fifth, enhanced disclosure should enable stakeholder scrutiny and market discipline.
Under these conditions, SLLs could potentially contribute to genuine sustainability improvements, particularly for borrowers in transition sectors requiring substantial capital for decarbonisation investments. However, the evidence indicates that current market practices fall significantly short of these conditions, suggesting that without substantial reform, SLLs will continue to function primarily as signalling and relabelling mechanisms with modest or undetectable sustainability impacts.
Conclusions
This dissertation has critically evaluated whether sustainability-linked loans drive real emissions reductions or primarily represent relabelling of conventional financing. Through systematic synthesis of the emerging empirical literature, the analysis has addressed five research objectives concerning design quality, measured outcomes, greenwashing risks, regulatory frameworks, and conditions for effectiveness.
The evidence demonstrates that whilst SLLs theoretically possess the capacity to incentivise meaningful emissions reductions and ESG improvements, their practical implementation reveals fundamental shortcomings. Most SLL contracts fail to incorporate credible key performance indicators characterised by materiality, genuine ambition, and robust external verification. The typical margin adjustments of 2 to 25 basis points provide insufficient financial pressure for substantive behavioural change. Critically, empirical studies consistently indicate no significant improvement in borrowers’ ESG performance following SLL issuance, suggesting these instruments fail to deliver the environmental improvements their sustainability framing implies.
The pattern whereby KPI quality correlates with pre-existing ESG performance suggests SLLs function primarily as signalling devices for firms with established sustainability credentials rather than transformation tools for high-emitting laggards requiring the strongest incentives for change. This adverse selection dynamic undermines the potential for SLLs to contribute meaningfully to economy-wide decarbonisation, as they may disproportionately reward existing good performance rather than driving incremental improvement.
The greenwashing and relabelling risks associated with current SLL market practices are substantial. The combination of structural flexibility, limited verification, and inadequate disclosure creates conditions conducive to cosmetic sustainability labelling without substantive environmental commitment. If unchecked, these risks may undermine confidence in sustainable finance more broadly, with implications extending beyond the SLL market.
The research objectives have been achieved through comprehensive analysis demonstrating that current SLL practices predominantly represent signalling and relabelling mechanisms with modest or undetectable sustainability impacts. The significance of these findings extends to investment decisions, lending practices, corporate sustainability strategies, and regulatory policy. Market participants should exercise caution in relying upon SLL involvement as evidence of genuine sustainability commitment, whilst regulators should prioritise strengthening of standards to ensure these instruments deliver their claimed environmental benefits.
Future research should address several limitations of the current evidence base. Longitudinal studies tracking sustainability performance over extended post-issuance periods would provide stronger evidence regarding medium and long-term impacts. Comparative analysis between SLLs with different design characteristics could identify structural features associated with genuine effectiveness. Investigation of borrower motivations and decision-making processes would illuminate the behavioural dynamics underlying KPI selection and target setting. Analysis of emerging regulatory frameworks’ impacts on market practices and sustainability outcomes would inform policy development.
Current research suggests sustainability-linked loans can support real improvements when KPIs are stringent and science-based, but in aggregate they mostly function as signalling and relabelling tools with modest or undetectable ESG and emissions impacts. Without strengthened regulatory frameworks, standardised taxonomies, and mandatory sector-specific performance indicators, SLLs will continue to represent symbolic rather than substantive contributions to the net-zero transition. The challenge for policymakers, financial institutions, and sustainability advocates is to reform these instruments to fulfil their potential as genuine drivers of corporate environmental improvement rather than permitting their continued exploitation for reputational benefit without commensurate sustainability outcomes.
References
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