The Principles of Responsible Investment (PRI), defined ESG loans :’as either general purpose loans whose terms are contractually tied to ESG performance (i.e., “ESG-linked loans”, alternatively termed “sustainability-linked loans”) or loans whose proceeds directly finance environmentally and socially conscious projects (i.e., “green loans”)’.
PRI distinguishes two types of ESG loans:
ESG-linked loans : ESG-linked loans are general purpose loans where loan pricing terms are tied to the ESG performance of the borrowing firm. They are commonly known as sustainability-linked loans (SLLs).
Green loans : similar to green bonds, green loans are loans where the proceeds are earmarked or set apart to exclusively finance environmental and climate-friendly projects (e.g., renewable energy, sustainable water, carbon capture…)
More specifically, SLLs are any type of loan instrument that incentivizes borrowers to achieve meaningful, predetermined sustainability goals embedded in key performance indicators (KPIs) incorporating sustainability goals.
These KPIs may be ESG scores assigned to borrowers by external rating agencies or specific measures such as greenhouse gas (GHG) emissions. These KPIs can also be defined by the issuer.