As the volume of sustainability linked loans rises, how can lenders avoid allegations of greenwashing?

Governments and regulators alike recognise that funders have a key role to play in ensuring that capital flows are increasingly focused on those businesses who take seriously their ESG responsibilities. It's therefore encouraging to note the rising volume of sustainability linked loans (SLLs).

Sustainability linked loans typically fund general corporate purposes (rather than any specific "green" purpose) and the borrower benefits from a modest reduction in the interest rate if prescribed sustainability performance targets are achieved. The benefits for borrowers are twofold. In addition to the modest potential financial benefit of a reduction interest rate, a borrower who can publicise that it has secured an SLL enjoys the myriad reputational benefits of being able to signal to its wider stakeholders (including shareholders, customers and employees) that its approach to sustainability has withstood independent scrutiny.

And that's where the danger lies for funders. Some commentators have recently criticised lenders for applying insufficient rigour when making available SLLs. That risk of insufficient rigour also prompted the recent establishment of the Green Technical Advisory Group, focused on tackling greenwashing in the financial sector.

So how can lenders minimise that risk? We suggest that prudent lenders will focus on the following 4 elements.

Appropriate Targets

Sustainability performance targets can relate to the borrower's environmental impact, its social impact or its governance in relation to sustainability (or any combination of these factors).

However, lenders should ensure that the targets are material, stretching and measurable. 


Each business will have a different impact on the environment and on society, depending on the nature and scale of its operations including its supply chain and sales/distribution methods. Targets should therefore be set by the borrower (and not suggested by the lender) in the context of the borrower's analysis of how it most materially and adversely impacts the environment and society. These areas should be the primary focus of the borrower's sustainability strategy. For example, where a borrower uses significant amounts of fossil fuels, targets which relate to the use of paper cups in its head office are unlikely to pass the materiality test.


The targets should be distilled from the borrower's sustainability strategy and action plan. They should not represent business as usual but should be ambitious. Their achievement should mark significant progress in the borrower's transition to a more sustainable future.


Given that hitting a target will trigger and margin reduction, both the target itself and the methodology for measuring its achievement, need to be clear.

In some cases, the materiality of the target, its stretching nature and its measurability are straight forward and the lender may feel comfortable making its own assessment of the appropriateness of the target. In many cases however, the target will relate to something beyond the expertise of the lender. In these cases, it is prudent for the lender to take advice from an independent expert. This is equally true where the measurement of achievement of the target is complex.

Credible Experts

The rise of the corporate sustainability agenda is inevitably spawning an increase in the number of advisors in this field. To avoid the risk of allegations on greenwashing, lenders should apply the same rigour here that they would to the appointment of other experts in the context of the lender's due diligence (such as valuers or financial due diligence experts). 

It will make sense for lenders who frequently advance SLLs to establish a panel of acceptable experts whose technical credentials and financial standing have been verified by the lender, noting that a broad panel may be required because, for example, experts on carbon emissions won't necessarily also be experts on modern slavery or access to healthcare and education.

Switch on

Some commentators have been critical about facilities which have the option to "switch on" a SLL feature at some future date. However, this criticism seems to run contrary to the overall objective of encouraging businesses to make progress with transition to a sustainable future. Where a borrower has not yet completed its assessment of its own sustainability priorities and formulated its strategy and articulated its targets, it may nevertheless make sense for it to establish the potential for a SLL rather than either miss the opportunity to benefit from an SLL ahead of its next refinancing or incur the cost of 2 refinancings in quick succession. This ability to "switch on" an SLL at a future date is increasingly of interest to private equity sponsors who put funding in place at the time of an acquisition but will only be in a position to carry out a strategic sustainability review and set a strategy and targets once the acquisition has occurred.

In these cases, prudent lenders will ensure that:

  • the margin reduction feature of the SLL cannot be triggered until both appropriate targets and appropriate means of testing and verifying their achievement have been agreed and
  • the facility agreement restricts the ability of the borrower to publicise the facility as an SLL until such time as the SLL feature has been "switched on"

Concepts of sustainability are fast evolving. Scientific and technological advances and political and societal consensus about what is acceptable all change quickly. So targets that were appropriately stretching 5 years ago, may now be regarded as outdated, lacking in ambition or, worse still, positively problematic.

Depending on the duration of the facility and the nature of the targets, it may therefore be appropriate to incorporate in the facility agreement a mechanic for the review and (if necessary) resetting of targets during the life of the facility.

Again, in any period during which no appropriate targets apply, the borrower should be precluded from holding itself out as having the benefit of an SLL.

Perceived Profiteering

Lenders should be careful not to be seen to profit from a borrower failing to meet the agreed sustainability performance targets. This risk is particularly acute if the facility includes a two-way margin ratchet which effectively imposes a penalty for failure to meet the agreed targets.

Given that the overarching objective is to encourage greater sustainability, arguably if the borrower fails to meet a target (such that a margin reduction is not achieved or an increased margin is triggered), the resulting benefit should not be pocketed by the lender but should be either channelled into other sustainability projects or ring-fenced for deployment in the borrower's business towards achieving its sustainability targets.

Green for Go

A focus on the elements outlined above will help lenders to minimise the risk of allegations of greenwashing. Our recent research revealed that banks exercise the greatest influence on businesses when it comes to sustainability [1]. We hope that lenders will seize the opportunity presented by that position of influence and continue and increase their focus on lending which accelerates sustainability while adopting prudent measures to avoid greenwashing.

[1] Survey conducted in late 2020 and early 2021 under the ethical research guidelines set by both the MRS (Market Research Society) and ESOMAR (European Society for Opinion and Market Research). The sample included 550 senior business leaders and 450 finance leaders (including investors, banks and insurers) based in the UK, Germany, the Netherlands and France.

Key Contacts

Amanda Gray

Amanda Gray

Partner, Financial Services London. UK

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