How Companies Get Cheaper Loans for Doing Social Good

Virtue can bring material rewards, as more companies are discovering when they reach out for a loan. Some banks have started to give borrowers discounts if they meet targets for doing good things, such as cutting pollution, reducing food waste or even assisting job seekers. To give the incentives teeth, there are penalties for missing goals. Global issuance of loans linked to environmental, social and governance (ESG) performance surged almost seven-fold last year to $36.4 billion, riding a wave of global demand for financing options that let companies promote themselves as socially responsible. This new sort of borrowing has different names, including positive incentive loans, ESG-linked or sustainability-linked.

No matter what they’re called, the deals are set up like normal term loans or revolving credit facilities, often with a group of banks providing a pool of funds for the borrower. Traditional loans are priced versus a benchmark rate used in lending between banks, such as the London Interbank Offered Rate or Libor. The borrower pays an additional premium, or spread, on top of this, which is based on factors such as credit ratings and deal length. An ESG-linked loan has an extra twist, a spread discount or penalty that depends on the borrower’s success in meeting specific targets.