The market for sustainability-linked loans (SLLs) has been experiencing rapid growth in recent years as companies seek to align their financing with their sustainability objectives.

Both lenders and borrowers increasingly recognise the potential benefits of integrating sustainability into financial decision-making. SLLs are financial instruments where the terms, including interest rates and repayment conditions, are tied to the borrower's performance against predefined sustainability targets or Key Performance Indicators (KPIs). Whilst these may cover environmental aims such as energy efficiency and reduction in carbon emissions, they can also include diversity and inclusion, or community engagement.

Unlike green loans or social bonds, where the funds are earmarked for specific environmentally or socially beneficial projects, SLLs are more flexible. The focus is on integrating sustainability considerations into the borrower's overall business strategy and operations, with lenders taking a collaborative approach to establishing targets and reporting mechanisms. Often, borrowers are required to report regularly to achieve transparency and help lenders with compliance.

Businesses can prepare themselves for SLL KPIs by taking proactive steps to integrate sustainability into their operations.

Understand sustainability objectives

Businesses should start by understanding their sustainability objectives, and then identify areas where they can improve their environmental, social, and governance (ESG) performance. This involves conducting a comprehensive assessment of their current practices, risks, and opportunities related to sustainability.

Set ambitious targets

Define clear and measurable targets that align with the company's overall strategy and priorities. These targets should be ambitious yet achievable within the timeframe of the SLL.

Align with global standards

Ensure that the targets set by the business align with global standards and frameworks, such as the United Nations Sustainable Development Goals (SDGs), the Task Force on Climate-related Financial Disclosures (TCFD), or industry-specific initiatives. This alignment enhances credibility and facilitates benchmarking against peers.

Integrate sustainability across operations

Integrate sustainability considerations into all aspects of the business, including supply chain management, product design, manufacturing processes, and employee practices. This holistic approach ensures that sustainability becomes ingrained in the company's culture and decision-making processes.

Invest in data and measurement systems

Implement robust data collection and measurement systems to track progress towards sustainability targets accurately. This may involve investing in software platforms, sensors, or other technologies to monitor KPIs related to energy consumption, carbon emissions, waste generation, water usage, and social impact.

Enhance reporting and transparency

Develop comprehensive reporting mechanisms to communicate the company's sustainability performance to stakeholders, including lenders, investors, customers, employees, and the broader community.

Engage with stakeholders

Engage with key stakeholders, including lenders, investors, regulators, employees, suppliers, and civil society organisations, to solicit feedback, share best practices, and build collaborative partnerships. Stakeholder engagement fosters accountability, trust, and support for the company's sustainability initiatives.

Build internal capacity

Invest in building internal capacity and expertise in sustainability management, including training programs, workshops, and knowledge-sharing initiatives. Empower employees at all levels of the organisation to contribute to sustainability efforts and drive meaningful change.

Establish governance and oversight

Establish clear governance structures and oversight mechanisms to ensure that sustainability initiatives are effectively implemented and monitored. This may involve creating dedicated committees, appointing internal champions, or integrating sustainability into existing governance frameworks.

By taking these proactive steps, businesses can effectively prepare themselves for SLL KPIs, demonstrating their commitment to sustainability, mitigating risks, and unlocking potential financial benefits associated with improved ESG performance.

Get in touch

Johnston Carmichael provides advice and support on establishing appropriate KPI frameworks to enable data to be captured, measured and communicated, as well as offering ESG assurance services to funders to provide independent assurance on the veracity of the disclosures.

For more information on SLLs or if you have any queries, please get in touch with me at mark.stewart@jcca.co.uk or another member of our Energy, Infrastructure and Sustainability team.