[2024-June-20]WG3 Webinar :Deep Dive into Sustainability-linked Loan (SLL)
On June 20, 2024, the GIP WG3 held a seminar titled “Deep Dive into Sustainability-linked Loan (SLL),” bringing together experts from Chinese and international banks as well as professional service firms to discuss the practices and trends in sustainability-linked loans.
Jennifer ZHOU, Head of Sustainable Finance at Standard Chartered Bank China, provided an overview of the current state of the sustainability-linked financing market. She noted that sustainability-linked financing remains an emerging financial instrument and because of its strong applicability across industries, making it a valuable tool for achieving ESG and climate goals.
Helen SU, Associate Director of Sustainable Finance at Standard Chartered Bank China, provided an in-depth explanation of sustainability-linked loans, which tie interest rates to a company’s sustainability targets, thereby incentivizing improved ESG performance. She detailed the bank’s criteria for selecting key performance indicators (KPIs), emphasizing that they must be material, relevant, benchmarkable, and quantifiable. Drawing on case studies from the shipping, construction, and data center industries, SU demonstrated how the bank selects specific KPIs and designs loan linkage mechanisms by referencing credible sectoral emission reduction pathways.
Nikita LEE, Sustainable Finance Business Manager at ISS-Corporate in Asia-Pacific, introduced ISS Corporate’s experience in providing Second-Party Opinions (SPOs) for sustainability-linked loans. She emphasized the importance of aligning KPIs with the borrower’s sustainability objectives and industry characteristics. She also explained how SPO reports demonstrate transparency, ensure consistency with market principles—such as those set by the Loan Market Association and International Capital Market Association—and provide independent evaluations. A typical SPO report includes three main sections: an assessment of the loan structure’s alignment with market principles, an evaluation of the credibility and ambition of the KPIs and sustainability performance targets (SPTs), and a review of the borrower’s sustainability strategy to link it to the financial instrument.
Adams WONG, Regional Lead APAC of Sustainable Finance Research at ISS-Corporate, explained the five key elements required by the Sustainability-Linked Loan Principles: the selection of KPIs, the calibration of SPTs, loan characteristics, reporting, and external verification. He emphasized that KPIs are evaluated based on whether they are core, relevant, and material to the borrower; measurable and quantifiable; and benchmarkable against peers and international standards. For SPTs, he outlined a three-layer assessment framework: assessing progress against the borrower’s past performance, benchmarking against industry peers, and ensuring alignment with international targets.
Elaine SHEN, FSI Manager at Deloitte China’s Sustainability and Climate Change Group, discussed regulatory and market trends in sustainability-linked loans. She pointed out challenges such as limited transparency and greenwashing risks due to regulatory gaps. SHEN stressed the importance of enhanced regulation and information disclosure and noted that the ISSB standards would play a key role in improving market transparency and stability.
Jianxun ZHAO, Director of the Green Research Division at Industrial Bank’s Green Finance Department, shared practices and prospects from the perspective of Chinese banks. He explained that Chinese banks often begin their SLL practices with renewable energy projects due to their relatively straightforward KPI and SPT design. These practices have gradually expanded to emission-intensive industries such as coal power and petrochemicals. Using the coal power sector as an example, ZHAO emphasized Industrial Bank's approach of leveraging verified emissions data from the national carbon market to ensure that emission reduction projects are aligned with scientifically grounded and achievable targets. He also highlighted the bank's efforts in supporting the steel industry and issuing dual-tranche green bonds. ZHAO anticipated that as transition finance regulations and standards continue to evolve, sustainability-linked loans and bonds are poised for significant growth.