Insights

The growing appeal of green and sustainability-linked loans

Sustainable finance regulation

Bethan Waters

Caroline Tatham

Suzanne Conticelli

In recent years, the financial landscape has seen a significant shift towards sustainability. One of the most notable developments in this area is the rise of green and sustainability-linked loans.

Green loans

Green loans (GLs) are a type of financing where the proceeds are exclusively used to fund projects that have a positive environmental impact, such as energy efficient retrofits of commercial and real estate buildings (eg installing LED lighting and smart lighting controls and enhancing insulation and glazing for thermal performance).

Sustainability-linked loans

Sustainability-linked loans (SLLs), on the other hand, are loans where the terms are linked to the borrower’s performance against specific sustainability targets, including reducing greenhouse gas emissions and improving energy efficiency. If the borrower meets or exceeds these targets, they may benefit from a lower interest rate.

As mentioned in our previous briefing (see here), lenders and borrowers have previously been hesitant to engage with green and sustainable lending. However, we are seeing a growing willingness among lenders, with a number of retail banks – including Barclays, Lloyds and NatWest – now offering green finance products (eg green mortgages), and investment banks entering into GLs and SLLs in commercial real estate finance (REF) deals (see below). At the time of writing, the Charities Aid Foundation also offers GLs for charities. These financial instruments are designed to support projects that have positive environmental and social impacts. But why might a borrower wish to opt for such loans? Let’s explore the key reasons behind their growing appeal.

1. Environmental impact

At the heart of green and SLLs is the commitment to environmental stewardship. These loans are often specifically tailored to fund projects that contribute to environmental sustainability. This includes initiatives such as renewable energy installations, energy efficiency improvements, and pollution prevention measures. By choosing these loans, borrowers can directly support the transition to a greener economy and help mitigate the effects of climate change.

For many companies, aligning their financial strategies with environmental goals is not just a matter of corporate social responsibility but also a strategic decision. It allows them to demonstrate their commitment to sustainability, which can resonate well with or even be required by stakeholders, including customers, investors, and employees.

2. Cost savings

One of the most attractive features of SLLs is the potential for cost savings by the borrower. These loans often come with financial incentives tied to the borrower’s performance on specific sustainability targets. If the borrower meets or exceeds these sustainability performance targets (SPTs) – for example, by successfully reducing its carbon emissions or increasing its use of renewable energy – it can benefit from reduced interest rates. This creates a win-win situation where the borrower not only contributes to environmental goals but also enjoys financial benefits. Over time, these savings can be substantial, making SLLs an economically attractive option.

3. Reputation and competitiveness

In today’s market, sustainability is more than just a buzzword; it’s a key differentiator. Companies that engage in sustainable practices can enhance their reputation and brand value. As mentioned above, this can make them more attractive to a wide range of stakeholders, including investors, customers, and business partners.

A strong commitment to sustainability can also help companies stay competitive. As consumers become more environmentally conscious, they are increasingly likely to support businesses that prioritise sustainability. Similarly, investors are looking for companies that are well-positioned to thrive in a future where environmental regulations and market expectations are likely to become more stringent.

4. Regulatory compliance

Environmental regulations are becoming increasingly strict worldwide. Governments and regulatory bodies are implementing policies aimed at reducing carbon emissions, promoting renewable energy, and protecting natural resources. For example, the UK’s HMRC introduced a tax in 2022 which applies to plastic packaging containing less than 30% recycled content.

GLs and SLLs can help companies meet such regulatory requirements. By funding projects that align with environmental regulations, companies can avoid potential fines and penalties. Moreover, they can position themselves as leaders in sustainability, which can itself be advantageous in dealings with regulators and policymakers.

5. Innovation and risk mitigation

SLLs can also help drive innovation within companies. By setting ambitious SPTs and key performance indicators, companies are encouraged to develop new technologies and processes that reduce their environmental impact and contribute to wider environmental goals.

Additionally, sustainable practices can help mitigate risks associated with environmental and social factors. For instance, companies that invest in energy efficiency are less vulnerable to fluctuations in energy prices. Similarly, those that prioritise sustainable supply chains can reduce the risk of disruptions caused by environmental, social or even political issues.

6. Recent examples

As mentioned above, activity in both the retail and commercial green and sustainability-linked lending space is starting to increase. Some recent examples include:

  • Nuveen Real Estate, one of the largest real estate investment managers in the world, provided a senior GL of £151 million to urbanest Battersea, secured against a brand new purpose-built student accommodation (PBSA) asset.
  • Puma Property Finance provided a £21 million GL to property construction company Kier Property to build Logistics City MK, a new 125,000 square foot sustainable industrial unit in Milton Keynes, which will include an environmentally friendly green roof, photovoltaic solar panels, outdoor amenity spaces, car park spaces with EV charging points, and several cycle spaces.
  • Leading property company, Bruntwood, secured a £140 million SLL which will increase its existing £50 million Club Bank facility (HSBC UK, NatWest, Santander and Barclays) and extend it by a further 12 months. The terms of the SLL align with Bruntwood’s ongoing sustainability commitments such as carbon intensity reduction and increasing renewable electricity procurement.
  • Barclays, as part of its broader initiative to support customers making greener choices, reduced rates on their Green Home five-year fixed mortgage to 3.96% in March 2025 for properties with an energy efficiency rating of 81 or above, or in energy efficiency bands A or B.

Conclusion

Green and sustainability-linked loans represent a powerful tool for companies looking to align their financial strategies with their environmental and social goals. By choosing these loan products, borrowers can support projects that have a positive impact on the planet, enjoy financial incentives, enhance their reputation, satisfy investors, comply with regulations, and drive innovation.

As the world grapples with the practicalities and challenges of achieving net zero, the role of innovative financial instruments like SLLs and GLs has never been more critical. These mechanisms not only provide capital but also embed accountability and ambition into the financial fabric of climate action. The Tony Blair Institute for Global Change (the Institute)[1] has underscored the importance of aligning financial systems with climate goals, advocating for scalable, market-driven solutions that can accelerate the transition to a low-carbon economy. In this context, GLs and SLLs are not just a tool – they are a necessity. They incentivise measurable progress, reward environmental leadership, and help bridge the gap between climate ambition and implementation. The Institute argues that now, more than ever, we must harness the power of finance to drive the green transition forward.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2025

[1] The Climate Paradox: Why We Need to Reset Action on Climate Change.

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