SMEs harvest financial benefits from ESG investing
In the past decade, we have witnessed a dramatic shift in the investment landscape as environmental, social, and corporate governance (ESG) issues have taken center stage. ESG, once limited to ethical investors, has gained mainstream adoption due to increasing awareness of sustainability challenges and changing investor expectations. This is fueled by the investors’ focus on risk management and alignment with societal goals.
Likewise, SME lenders are recognizing this growing global emphasis on sustainability and climate change. They are joining the ESG movement by adding Sustainability-Linked Loans (SLLs) to their portfolios. This endeavor is not solely aimed at enhancing their reputation but also to capitalize on the financial and social advantages it offers.
In 2021, Sustainability-Linked Loans reached a value over 700 billion dollars.
What is a Sustainability-Linked Loan (SLL)?
An SLL is a type of loan in which the sustainability performance of the borrower is linked to an economic outcome. To illustrate, if a borrower with an SLL achieves specific ESG objectives set by the lender, the interest charged on the loan will decrease. This means that the interest rate charged on a debt instrument will align with the borrowing company’s sustainability performance and rating. However, if the company falls short of these targets, the borrower will pay a higher interest rate.
SLLs encourage companies to decrease their borrowing expenses by improving their sustainability practices, while also helping lenders minimize their environmental and social risks.