Sustainability linked loans: practical insights from experience

What is a sustainability linked loan?

A SLL is a loan in which the interest rate and other terms depend on the borrower meeting agreed sustainability goals. Unlike green loans, which require funds to be used for specific projects, SLLs offer flexibility as the focus is on outcomes, not how the money is spent.

The most common key performance indicators (KPIs) relate to emissions reduction, energy efficiency, or social impact. If targets are met, the borrower benefits from improved terms, if not, the cost of borrowing may increase. This structure encourages organisations to embed sustainability into their core strategy and rewards genuine progress.

Why SLLs make sense for many organisations

Recognition for existing efforts

Many companies already have established sustainability strategies and implementation plans. SLLs provide a mechanism to have these efforts independently recognised and financially incentivised.

Flexibility

SLLs are not limited to specific projects, making them suitable for a wide range of organisations and sectors.

Transparency and accountability

Guided by the Loan Market Association (LMA) SLL Principles, a loan specific approach may be taken to regular reporting and verification building trust with stakeholders and supports regulatory readiness.

Market access

As sustainable finance becomes mainstream, SLLs can help organisations access a broader pool of capital. 

The SLL process- practical steps

Based on our experience supporting both lenders and borrowers, the following steps are key to a successful SLL:

Assess current strategy and data

• Review existing sustainability commitments and performance data.
• Identify which achievements are most suitable for inclusion as KPIs.

Select and define KPIs

• Engaging with lenders, choose KPIs that are material, measurable, and aligned with business priorities.
• Emissions reduction is a frequent choice; robust data and methodologies are essential.

Set targets

• Targets should be ambitious but achievable, ideally aligned with science-based frameworks.
• Engage with lenders early to ensure targets meet market expectations.

Structure the loan

• Agree on how performance will affect loan terms.
• Define clear reporting and verification requirements.

Monitor, report, and verify

• Implement systems for ongoing data collection and monitoring.
• Use independent verification to maintain credibility. 

Emissions as a KPI: lessons from practice

Emissions reduction remains the most common SLL KPI, reflecting its materiality across sectors and its alignment with global climate objectives. The process typically involves:

• Calculating baseline emissions using recognised standards such as the GHG Protocol, ISO 14064 for carbon neutrality claims. For financial institutions, the Partnership for Carbon
• Accounting Financials (PCAF) standard is increasingly critical for measuring and disclosing financed emissions.
• Setting reduction targets, ideally aligned with Science Based Targets initiative (SBTi) guidance to ensure ambition and credibility.
  Developing a climate transition plan that outlines how targets will be achieved.
• Regularly reporting progress and engaging independent verification, as required to maintain transparency and trust.

It is important to note that Scope 3 emissions, often the largest share, can be particularly challenging to measure and influence, requiring appropriate methodologies and sector-specific benchmarks. Lenders and borrowers are also expected to align with evolving standards such as the LMA’s Sustainability Linked Loan Principles, International Capital Market Association (ICMA) Sustainability Linked Bond Principles, and the EU Taxonomy.

At Grant Thornton, we have supported clients in all aspects of this process, from developing emissions inventories and climate transition plans to providing independent assurance over reported data. Our experience includes working with banks to design SLL frameworks that are comprehensive, practical, and aligned with market standards as they evolve.

Supporting both sides of the table

Our work has spanned both the lender and borrower perspective. For banks, we have helped develop governance frameworks and KPI registries, ensuring consistency and rigour in how SLLs are structured and monitored. For corporates, we have provided practical support in identifying relevant KPIs aligned to strategy, setting targets and developing transition plans to achieve them.

This dual perspective means we understand the challenges and opportunities at every stage of the journey. We provide advice that is grounded in real-world experience, supporting clients to achieve both credibility and ambition.

Conclusion

Sustainability Linked Loans offer a practical way for organisations to be recognised for the progress they are already making on sustainability. The process is rigorous, but with the right approach, and the right support, it can deliver both financial and reputational benefits.

Our experience at Grant Thornton is that success with SLLs comes from a collaborative, transparent approach, grounded in robust data and a clear understanding of both lender and borrower needs. We are committed to supporting organisations at every stage, helping them navigate complexity and realise the full value of their sustainability strategies.