In this four-part blog series, we’re exploring some of the key “green” financial offerings emerging in today’s banking market and why banks should pay attention to them. Part one explored the inner workings of green financing and green bonds. In part two, we’ll cover sustainability-linked loans and sustainable supply chain finance (SSCF).
What is a sustainability-linked loan?
According to the Sustainability Linked Loan Principles, released in July 2021, a sustainability-linked loan covers “loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) which incentivize the borrower’s achievement of predetermined sustainability performance objectives.”
In effect, a sustainability-linked loan links the terms of a loan—often the pricing—to the borrower’s performance against specific sustainability targets. These targets are typically negotiated and agreed upon between the borrower and lender group for each transaction.
Contrary to a green loan, a sustainability-linked loan can have “non-green” purposes, such as the financing of general corporate objectives. Further, a loan can be structured as either type of loan at the same time.
The rise of sustainable supply chain finance
According to the Business for Social Responsibility, SSCF is defined as supply chain finance (SCF) practices that integrate environmental, social and/or governance (ESG) considerations with a view toward driving sustainable behaviors in global supply chains.
Essentially, SSCF rewards suppliers for being sustainable. Those rewards can take different forms. For example, a supplier with good ESG performance could receive better finance rates or terms than other suppliers, or even gain access to an exclusive supply chain program.
Such programs are typically led by corporate buyers and implemented to build and incentivize a more sustainable supply chain.
SSCF advantages and drawbacks
Since 2014, several leading global brands, such as Walmart, Puma and Levi Strauss, have implemented sizable SSCF programs, and most major banks tout the success of their SSCF programs. However, there are some notable SSCF obstacles, including difficulties in monitoring suppliers’ sustainability-related activities, reporting variations due to a lack of common standards, or even fraud.