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In theory, this model incentivizes companies across sectors to align with ESG principles and pursue measurable improvements in environmental or social outcomes. In practice, however, concerns are mounting over whether these instruments are delivering meaningful change—or simply enabling well-branded greenwashing.

As ESG-focused investment becomes mainstream, the credibility of tools like SLLs will define whether sustainable finance lives up to its potential—or falls short as a facade. This article unpacks the mechanics of SLLs, the challenges they present, and the role of expert guidance in ensuring they serve as genuine levers of progress rather than public relations strategies.

Understanding the Mechanics of SLLs

SLLs operate on a simple principle: a borrower agrees to certain ESG-related Key Performance Indicators (KPIs), and the lender ties loan pricing to performance against these metrics. Unlike green loans, the proceeds from SLLs do not need to be tied to green assets or projects—they can fund any activity, provided the borrower demonstrates improved ESG performance.

Typical KPIs include:

• Reducing Scope 1 and Scope 2 greenhouse gas emissions
• Increasing the share of renewable energy used in operations
• Improving gender diversity or occupational safety metrics
• Enhancing water efficiency or reducing waste generation

When performance targets are met (or exceeded), the borrower enjoys reduced interest margins. Failure to meet targets may trigger penalties or eliminate preferential terms. At face value, this structure should create a market-driven incentive for progress. But the quality and credibility of the targets—and how progress is measured—make all the difference.

The Accountability Gap: Where SLLs Fall Short

One of the most pressing criticisms of SLLs is the lack of regulatory standardization. Unlike green bonds, which are guided by frameworks such as the Green Bond Principles or the EU Green Bond Standard, SLLs currently rely heavily on self-defined goals and voluntary disclosures. This opens the door to manipulation, inconsistent reporting, and low-impact outcomes.

Too often, the KPIs embedded in SLLs are:

• Non-material, meaning they don’t target the borrower’s core sustainability impacts
• Insufficiently ambitious, allowing firms to meet targets with minimal operational changes
• Vague or subjective, reducing transparency and comparability across markets

For instance, some borrowers commit to reducing carbon intensity (e.g., emissions per revenue unit) while expanding operations that increase absolute emissions. Others choose metrics that are already in progress or close to completion, effectively gaming the system for favorable terms with limited effort.

This lack of integrity risks undermining ESG Reporting and damaging market trust in sustainable finance as a whole.

SLLs in High-Impact Sectors: Green Incentives or Green Disguise?

The challenge becomes particularly acute in emissions-heavy sectors like oil and gas, mining, aviation, and heavy manufacturing. These industries stand to benefit the most from lower-cost capital—but also pose the greatest risk of greenwashing if not held to rigorous standards.

Take the example of oil and gas firms receiving SLLs tied to intensity-based emission targets, all while increasing fossil fuel production. Or mining giants who pledge to improve worker safety or water efficiency without addressing systemic ecological damage.

In such cases, lenders and borrowers alike benefit financially from a sustainability label—yet the actual environmental or social outcomes remain dubious. This not only distorts ESG focused investment strategies but also penalizes companies that are authentically transitioning through real decarbonization or social equity initiatives.

For SLLs to fulfill their intended role, they must move beyond optics and be grounded in science-based targets, independent verification, and robust ESG frameworks.

How to Make SLLs Credible: Principles for Responsible Structuring

While SLLs are not inherently flawed, their efficacy depends entirely on the integrity of their design and governance. Several guiding principles are now emerging as best practices for ensuring SLLs deliver genuine value:

1. Materiality & Relevance

KPIs must reflect a company’s most significant ESG impacts. For a logistics company, this might be fleet emissions. For a food company, it may be water use or packaging waste. The focus must be on what matters most—not what’s easiest to report.

2. Ambition & Alignment

Performance targets should be forward-looking and aligned with international frameworks like the Paris Agreement or SDG benchmarks. “Business-as-usual” improvements do not qualify.

3. Independent Verification

External reviewers or ESG consultants should evaluate both target-setting and performance achievement. This adds transparency and reduces the risk of internal bias.

4. Transparent ESG Reporting

Borrowers must commit to publishing annual updates detailing progress, methodologies, and deviations from target—ideally in line with ISSB, GRI, or SASB standards.

5. Consequences for Underperformance

Loans should include pricing step-ups or reputational triggers if targets are not met, ensuring accountability over the life of the loan.

By embedding these principles, lenders and corporates alike can restore trust in the purpose and performance of SLLs.

The Role of ESG Advisors: A Critical Link to Integrity

At IFRSLAB, we have witnessed first-hand the rising demand for Sustainability-linked finance and the parallel rise in skepticism from investors and regulators. We see SLLs as powerful tools—but only when implemented with rigour, independence, and a commitment to real impact.

Through our ESG Advisory services UAE and ESG Consulting UAE, we support both borrowers and lenders in:

• Designing KPIs that are ambitious, relevant, and auditable
• Developing target-setting methodologies aligned with science-based standards
• Integrating ESG Reporting that meets both regulatory and investor expectations
• Conducting independent verification or audit of target achievement
• Structuring pricing mechanisms to reward authentic progress—and penalize underperformance

For companies pursuing ESG focused investment or sustainability-linked finance, the presence of a credible third-party advisor is increasingly becoming a prerequisite—not just a nice-to-have.

ESG Focused Investment and the Future of SLLs

Institutional investors are rapidly integrating ESG metrics into portfolio decisions. Many now demand clear alignment between an issuer’s ESG Reporting and the financial instruments they issue or engage with. In this landscape, SLLs can either represent:

• A compelling pathway for ESG focused investment, offering both financial returns and impact metrics; or
• A reputational liability, if exposed as structurally weak or misleading.

This makes due diligence on SLL structures an essential part of sustainable investing. Lenders, borrowers, and investors alike must scrutinize:

• The credibility of chosen KPIs
• The transparency of reporting mechanisms
• The rigor of third-party validation
• The extent of real-world impact

Without these safeguards, the SLL market risks losing credibility—especially in emerging markets where regulation is still evolving.

Policy Recommendations: Protecting the Integrity of Sustainable Finance

To ensure the future of SLLs as a legitimate tool in the sustainability transition, policymakers and regulators in the MENA region—and globally—should consider the following interventions:

• Codify SLL principles into regulatory frameworks, especially around target-setting and disclosures
• Mandate third-party attestationfor performance tracking and ESG Reporting under SLLs
• Establish public registriesfor transparency, enabling stakeholders to track issued SLLs and their outcomes
• Incentivize ambitious borrowersthrough blended finance models and guarantee structures

By formalizing these expectations, financial ecosystems can ensure that SLLs work for the planet and people—not just profit margins.

Conclusion: SLLs Must Earn Their Place in Sustainable Finance

Sustainability-Linked Loans are at a crossroads. They can be harnessed as flexible, scalable instruments to drive ESG performance—or they can become hollow symbols of intent, undermining the credibility of the broader sustainability movement.

The difference lies in the quality of design, the strength of governance, and the clarity of outcomes. For companies and financial institutions navigating this space, the opportunity to lead with integrity has never been more valuable.

At IFRSLAB, we’re here to ensure that sustainability-linked finance isn’t just smart finance—it’s responsible, transformative, and real.