Sustainability-linked loans (SLLs) and sustainability-linked bonds (SLBs) have garnered considerable attention in the sphere of sustainable finance, leading to the global sustainable debt market exceeding $4 trillion by 2022. SLLs, as a contemporary financial model, incorporate sustainability performance targets (SPTs) into their framework, where a segment of the interest rate margin is tied to the borrower's capacity to meet predetermined sustainability goals. The SLL sector has witnessed swift expansion, reaching $447.3 billion in 2022. Prominent features of SLLs encompass unrestricted use of funds, diverse loan terms associated with SPTs, and ambitious and quantifiable key performance indicators (KPIs) spanning various sustainability domains.

On the contrary, SLBs represent bonds whose financial or structural components can be altered based on predefined sustainability or ESG objectives. The issuance of SLBs amounted to $103 billion in 2021, indicating increasing interest from investors and issuers. SLBs set themselves apart by integrating SPTs that issuers pledge to accomplish, with monetary incentives linked to these targets. The Sustainability-Linked Bond Principles (SLBP) outline directives that underscore transparency and disclosure to uphold the credibility of SLBs, encompassing elements like KPI selection, SPT calibration, bond attributes, reporting, and validation.

While SLLs and SLBs adhere to shared principles by tying pricing to sustainability metrics, distinctions arise in areas such as SPT calibration, pricing, reporting, and external review. Despite their expansion and potential advantages in promoting sustainability outcomes, obstacles endure, including flexibility in expenditure, consistency of metrics, relevance and ambition of metrics, reliability of performance data, and financial implications. Nevertheless, sustainability-linked finance presents a hopeful path for motivating issuers and borrowers to achieve environmental or social objectives while possibly lowering financing costs, supported by robust principles and frameworks governing their execution and assessment.