Sustainability-linked loans: How do they work?
Will sustainability-linked loan agreements be the future of the post-pandemic food system? Sustainability-linked loan agreements are becoming increasingly popular as banking institutions use their financial resources to give incentives to companies to become more environmentally-friendly, explains Netherlands-based Rabobank’s Head of Sustainable Capital Markets Maarten Biermans in this Financial Times video (watch, runtime: 03:24).
Sounds great, but how does it work? Banks and companies agree on sustainability targets when inking loan agreements. Once the targets are reached, the interest rate on the loan decreases. In many cases, the borrower gets penalized if they fail to meet their targets, resulting in the interest rate increasing. These targets often include reducing water usage and CO2 emissions, improving energy efficiency, and introducing electric vehicles.