Corporate loans whose costs are linked to environmental, social and governance (ESG) goals are being redesigned by banks in response to rising regulatory pressure and to inject more credibility into a market they hope to grow, Reuters reported. Sustainability-linked loans (SLL), which were first used in 2017, offer slightly cheaper borrowing, typically around 2.5-10 basis points less, if companies meet goals such as cutting their carbon emissions or improving board diversity. Banks need to balance tougher standards without killing demand for SLLs, which unlike loans tied to specific projects allow borrowers to use the money raised however they choose, as they count towards lenders' own sustainable finance commitments. Of 14 major banks reviewed by Reuters, JPMorgan was the only one which did not automatically count labeled loans and bonds towards its own sustainable finance target. Amid increasing regulatory scrutiny and suggestions that SLLs enable companies to inflate their green credentials, LSEG data shows issuance has slumped by 36% to $310 billion so far in 2023, from $480 billion in 2022. Total loan volumes also fell in the period, but by a less sharp 21%.
