Years ago, the terms “sustainable finance” and “green lending” were more often used in discussions relating to our progressive distant future. 

Sarah.Spurling - Mishcon de Reya

Sarah Spurling - Mishcon de Reya

Mounting pressure across various sectors to promote sustainable recovery from the COVID-19 pandemic, reduce carbon footprint and slow down climate change have converted these discussions into our reality. These pressures, coupled with the financial incentives offered by some sustainability-linked financial products, have made them increasingly attractive, which is likely to continue in the new high-interest-rate world.

The Loan Market Association (LMA), the recognised trade body for the EMEA syndicated loan market, has been pivotal in making the integration of ESG into transaction a key talking point and offering support, guidance and a progression towards market-consistency in its correspondence with regulators and creation of its own dedicated Sustainable Lending microsite.

In the world of Sustainable Lending, a “green loan” is generally taken to be any loan made available to finance or refinance new or existing green projects and, whilst there is no definitive list of eligible projects, the LMA’s high-level framework of market standards and guidelines for use across the green loan market (the Green Loan Principles) lists out some potential categories including production and transmission of renewable energy or development of clean transportation or sustainable water and wastewater management. The purpose to which the proceeds of the loan will be applied is key. By contrast, a sustainability-linked loan is a loan which incentivises the borrower’s achievement of ambitious, predetermined sustainability performance objectives by reference to measured sustainability performance targets (SPTs), but can be applied towards almost any purpose. Here, too, the LMA has created a framework to facilitate a shared understanding of the key characteristics of a sustainability-linked loan – the Sustainability Linked Loan Principles.


In the last couple of years, the lending market has seen a significant increase in the use of sustainability-linked loans across all sectors, including real estate (where historically the funding of new buildings and green assets might have naturally fit into the green loan model). So it is perhaps not surprising that this is borne out by our Debt Finance team’s experience having, in recent months, advised a number of borrower clients on sustainability-linked loans, including, most recently in September 2022, advising a large property investment and development plc on a sustainability-linked loan in excess of £300m. As part of this process, three KPIs with annual SPTs were negotiated and agreed with a syndicate of clearing banks and non-bank lenders. Not only did this refinance demonstrate our client’s commitment to sustainability and its aim to become Net Zero by 2030, but it also enabled them to benefit from a margin reduction of up to 3 basis points if it were to achieve such SPTs.

Our observations on the market

We typically see between 3 and 5 SPTs for any sustainability-linked loan, set with the relevant borrower’s own ESG framework in mind. Example SPTs include increasing use of renewable energy, reducing greenhouse gas emissions, using more energy/water efficient processes or machinery or creating a positive corporate culture through volunteering hours targets. The key is to aim for (and test and evidence) consistent improvements in the relevant KPI over time, which can be unexpectedly challenging for an already ESG-progressive borrower.

Despite the advantages of sustainable lending, our experience is that the process of agreement and execution of documentation is often more involved with a sustainability-linked loan. This is natural as the market is still evolving and lenders are very mindful of the need to properly interrogate both the headline SPTs and the appropriateness of the related KPIs, targets and terms. This is likely to improve over time, but lenders will continue to take self-regulation of the Sustainable Lending market seriously for some time.

Fundamentally, there is no “one size fits all” where ESG is concerned. Businesses looking to take advantage of green or sustainability-linked funding are encouraged to consider ESG in light of their own business as a whole and to approach lenders with their own suggested, measurable targets, instead of trying to replicate KPIs implemented by their competitors or leaders in other industries. Ultimately, if the selected KPIs are not based upon borrower-specific business plan, financials and business information, there is a risk that they will be inappropriate, difficult to achieve and open to accusation of green and sustainability washing.

This is why, despite calls from some commentators and stakeholders for a move towards standardisation of KPIs, testing and terminology as the market matures, to us it seems more likely that lenders, borrowers and their legal and non-legal advisors will continue to take their sector-relevant experience and adapt it on a case-by-case basis.

Sarah Spurling is a partner and Roya Zohrabi is a managing associate in the Debt Finance Team at Mishcon de Reya LLP.