How a Downturn in ESG-Linked Loans Prompted a Rethink

After years of rapid growth, ESG-linked loans are suffering the worst drought since their inception in 2017. Companies that issue them can enjoy discounts or incur penalties on their interest rates if they meet or miss targets on environmental, social or governance metrics such as cutting pollution, reducing food waste or promoting gender equality. The downturn follows a period of bumper sales during the pandemic. With investors now questioning the usefulness of many ESG investments, a rebound will depend partly on whether issuers can make these products more transparent, and their goals more ambitious.

Global issuance of the products, also known as sustainability-linked loans or SLLs, slumped by almost 70% to $108 billion in the first eight months of 2023, the largest decline among all categories of ESG debt, including sustainability-linked bonds and green loans. Sales peaked at more than $500 billion in 2021. They were still the second-biggest type of ESG debt by overall volume after green bonds, with about $1.2 trillion outstanding in mid-2023, most of them held by European investment-grade companies.

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