Sustainability Linked US Loans: Not Much Greener than Sustainability Linked Bonds

Sustainability Linked US Loans: Not Much Greener than Sustainability Linked Bonds
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Last month we took a look at “sustainability linked” bonds. Now, in a new report, Xtract Research turned to sustainability linked loans.

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Q4 2020 hedge fund letters, conferences and more

Highlights from the report include:

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The Greenish Features Of Sustainability Linked Loans

As compared to sustainability linked high yield bonds (SLBs), the greenish features of sustainability linked loans (SLLs) appear stronger than their capital market counterparts. However, while there is more variety in the sustainability goals and borrower transparency, the impact of the achievement those goals on the economics of the deal could be quite modest.

As compared to SLBs, we have seen a broader range of sustainability strategies, beyond purely environmental aims, including increasing the percentage of female employees and reducing the incidence of workplace injuries.

SLL proceeds can be used for anything and are not tied to a green or sustainable project. The borrower’s deployment of funds raised may be completely unrelated to its sustainability goal and is not germane to the debt being labeled "sustainability linked".

Pricing is tied to the company’s performance relative to achieving the target. If the economics of the deal are linked to the borrower’s sustainability performance, borrowers are, in theory, incentivized to improve their sustainability profile over the term of the loan.

Annual Reporting Obligation

Sustainability linked loans have an annual reporting obligation, as the adjustments are revisited annually via a compliance or pricing certificate, signed by “responsible officer” and attaching the KPI Metrics Report, which is audited by the KPI Metrics Auditor in some deals. Remember though, ESG debt is still very “green” and verification by an “expert” could be a loose standard.

Sustainability linked debt is still in its infancy, but we may very well see more of it in the near term. Indeed, at least one company, Nesco, included an ESG debt basket in its most recent bond.

With no real market standards, the establishment and determination of achievement of the ESG target in the purview of the company and in some cases no consequence to the company for failure the achieve those targets, like SLBs these deals may simply be feel good loans, paying lip service to ESG goals (of both the borrower and lender) by including a pale green link sustainability goals and pricing.

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Jacob Wolinsky is the founder of, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at) - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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