Sustainable finance put to the data test: KPIs matter more than labels

Sustainability-linked loans tie interest rates to the achievement of ESG targets and, in just a few years, have become one of the most widespread instruments in sustainable finance. But do they really work? A study by Gennaro De Novellis, Salvatore Perdichizzi, and Gian Paolo Stella, based on nearly 4,000 syndicated loans, suggests that they work only when the environmental targets they are linked to are well designed, measurable, and relevant.

On average, sustainability-linked loans do not produce significant improvements in either emissions or environmental performance. But when the KPIs are clear, verifiable, and material, the effect emerges: companies significantly improve their environmental rating over time.

At a time when there is discussion about simplifying reporting requirements, it becomes important to avoid the risk of reducing the quality of the data these instruments rely on, because without reliable data, sustainable finance risks losing its effectiveness.

Green or sustainability-linked?

In recent years, sustainable finance has taken on a central role in the effort to align capital with the ecological transition. Two instruments, in particular, have become established in the syndicated loan market, that is, loans granted to a company by a group of financial institutions:

• green loans, which directly finance environmental projects (renewable energy, energy efficiency, and so on);
• sustainability-linked loans (SLLs), which do not restrict the use of funds but tie the interest rate to the achievement of ESG targets.

The literature had already shown that green bonds and, to some extent, green loans produce concrete effects. The case of SLLs, by contrast, was more uncertain: they are more flexible instruments, but also more exposed to the risk of ambiguity or greenwashing.

The research, therefore, asks: Do these instruments really generate measurable environmental improvements? And to what extent does contractual design, and in particular the quality of the KPIs, make a difference?

Good, but few

The study analyzes a large global dataset of 3,859 syndicated loans issued between 2018 and 2022 to large companies.

Among SLLs, only 22.5% have environmental KPIs that are truly transparent and measurable.

The researchers track companies for up to three years after the loan is issued, observing CO₂ emissions and environmental ratings (Environmental score, from 0 to 100).

From a methodological standpoint, the study compares similar companies in order to isolate the effect of the type of financing.

Green loans show a strong and growing impact over time. Companies that receive green loans significantly reduce emissions, with an effect that increases over time: a reduction is already visible after one year, and after three years the effect becomes much larger and statistically significant.

Sustainability-linked loans show no average effect on emissions at any time horizon.

However, when the analysis isolates SLLs with transparent environmental KPIs, a significant improvement in environmental ratings emerges. The effect becomes particularly strong over the long term, reaching up to +8 points in Environmental score after three years. More than the instrument itself, what makes the difference is the way it is designed.

Preserving disclosure quality

The study shows that not all sustainable finance is the same. Green loans work because they restrict the use of funds: they directly finance activities that reduce emissions, and the results are visible. SLLs, by contrast, work only if the incentive mechanism is credible. When KPIs are vague, not very transparent, or not material, the effect disappears.

Corporate managers should therefore make an effort to negotiate KPIs that are specific, measurable, and consistent with their environmental impact, because targets that are too generic risk producing no real benefit.

Banks and investors should design rigorous contracts, because unclear KPIs can trigger interest-rate discounts without generating concrete impacts, creating an obvious risk of greenwashing.

There is also a systemic issue. Today, only about one SLL in five includes truly transparent KPIs: the room for improvement is enormous. For policymakers, this translates into a priority to preserve, or strengthen, the quality of disclosure. Reducing information requirements may simplify things, but it risks weakening the very mechanisms that make sustainable finance effective.

Gennaro De Novellis, Salvatore Perdichizzi, Gian Paolo Stella, “Do sustainable loans deliver? Evidence from the syndicated loan market”. Finance Research Letters, Volume 95, 2026, 109701. DOI: https://doi.org/10.1016/j.frl.2026.109701.