Also known as a KPI-linked loan, ESG loan, or ESG-linked loan, an SLL is a loan that incentivizes a borrower to improve its sustainability or environmental, social, and governance (ESG) performance by directly linking the financial terms of the loan to predetermined sustainability performance targets (SPTs) as measured by predefined key performance indicators (KPIs). The loan's economic characteristics (for example, margin and fees) vary depending on whether the borrower achieves ambitious, material and quantifiable predetermined SPTs.

If a borrower meets the agreed SPTs, the margin on the loan is reduced by a certain amount. If, by contrast, the borrower does not meet its targets, the margin is increased. Unlike other sustainable financing products, such as green loans or social loans, the proceeds of an SLL may be used for any purpose.

A SLL can be any type of bilateral or syndicated loan financing, including term loan, revolving credit facility, or any other type of facility (including contingent instruments), where there is an economic impact tied to whether the borrower achieves the predetermined SPTs.

The LSTA, Loan Market Association, and Asia Pacific Loan Market Association have published a set of principles (the Sustainability-Linked Loan Principles) and related guidance (Guidance on Sustainability-Linked Loan Principles) that set out the components a loan must comply with to be marketed an SLL (see the LSTA's Sustainable Lending Library).

For more information on SLLs, see Practice Notes, Understanding Sustainability-Linked Loans and What's Market: Sustainability-Linked Loans.