The connection between the environment and the lending system is often ignored in popular literature. But the fact remains that how a company uses its borrowings can have unsustainable impacts on the world at large and be devastating for the global economy. This is why many banks have started offering sustainability-linked loans. Here we understand what these loans entail and how they dictate the work done by CIOs, IT managers and IT companies.

What is sustainability-linked loans?

Sustainability-linked loans are specific loans that are given to companies in order to help achieve targets related to company/business sustainability. These goals also include social improvement targets and objectives that are directed at improving the country/economy in some way.

Sustainability-linked loans vs Green loans

You might have heard of “Green Loans”. Typically, these loans are offered against targets that are specifically related to nature, climate change and the environment. For example, a company wants to procure technology that doesn’t depend on lithium-ion batteries to operate. By changing the technology, they use, they are reducing their impact on climate change and environmental safety. The loan a company takes for this is the green loan.

In comparison, sustainability-linked loans can be procured to achieve any sustainability targets. These loans are essentially developed to help generate sustainable development/growth in the community as a whole. 

ESG and SLLP

ESG refers to Environmental, Social, and (Corporate) Governance. It is the new investing method that banks, VCs and investors are using to judge the value behind each loan or funding application. Essentially, banks and investors want to fund and support those companies which are diverse, inclusive, eco-conscious and fair & equitable.

SLLPs represent Sustainability-linked loans Principles. These are the innate steps that borrowers of sustainability-linked loans must follow in order to meet the ESG requirements of banks during borrowing. The components of the SLLP are:

Selection of KPI

Borrowers must share information about what KPIs they are using to measure their sustainability goals. These KPIs should be related to the ESG objective and must show lenders clearly whether the company has met these KPIs or not.

For example, the Sustainability performance target (STP) could be reducing investment in new IT development/purchase. The KPIs for this could be:

- Reducing resource utilization.

- Reusing technology where it can be, instead of building or buying new ones.

- Lesser obsolescence of IT technology.

Calibration of SPTs

SPTs must be calibrated regularly according to KPIs. So, IT companies will be asked to prove to banks that they are actively trying to meet their SPTs and live up to their agreement with their banks. CIOs and IT managers may also be expected to provide a timeframe within which they will be able to meet specific SPTs. For example, within 6 months, there will be fewer instances of replacing a particular hardware part throughout the firm.

Loan Characteristics

This represents the terms on which banks lent the sustainability-linked loans to the company in the first place. Typically, IT companies that are able to meet their sustainability initiatives will receive a discount in the loan amount to be repaid. However, if IT companies fail to meet their sustainability targets after getting sustainability-linked loans, they will receive a penalty hike in the amount to be repaid.

Reporting

Lenders can choose to not offer future sustainability-linked loans to certain companies that may have not been transparent enough about their investing. CIOs are required to provide detailed reports about their progress with SPTs and any challenges they’ve experienced. Here, IT companies need to show how their sustainability-linked loans are being used on the ground and whether that money has had any real-world value or not.

Verification

Finally, many banks expect IT companies to get their firm verified by a specialist who has expertise related to the company’s SPT. For example, a climate change expert, an auditor, financial rating agencies etc. This verification is shared with the bank and they take a decision about lending more sustainability-linked loans to the IT company or not.