Sustainability-Linked Loans: Bridging Corporate Growth and Environmental Responsibility
The rise of sustainable financing has become a cornerstone of Singapore’s commitment to environmental and social progress. For companies seeking reliable banking law services, sustainable loans are a critical part of this strategy, aligning with the country’s long-term goals such as those outlined in the Singapore Green Plan 20301.
This article explores the concept of sustainable loans, their growing relevance, and examples in loan financing in Singapore.
What Are Sustainable Loans?
Sustainable loans are designed to provide funding for initiatives that generate positive environmental, social, and governance (“ESG”) outcomes. These loans generally fall into two main categories: (i) green loans and (ii) Sustainability-Linked Loans (“SLLs”)2.
Green loans are specifically allocated to projects that have clear environmental benefits. Examples include renewable energy systems, clean transportation (i.e. electric, hybrid or non-motorised), eco-friendly building projects, and waste management solutions. Borrowers must demonstrate that the funds are being used for activities that directly contribute to environmental sustainability and are congruent to the components of the Green Loan Principles.
Unlike green loans, SLLs do not focus on specific projects. Instead, they encourage companies to meet Sustainability Performance Targets (“SPTs”). The loan terms, such as interest rates, are adjusted based on the borrower’s ability to achieve these goals, promoting corporate accountability3. The diagram below sets out examples of SPTs4.
| Category | Example |
|---|---|
| Energy Efficiency | Improvements in the energy efficiency rating of buildings and/or machinery owned or leased by the borrower. |
| Greenhouse Gas Emissions | Reductions in greenhouse gas emissions in relations to products manufactured or sold by the borrower or to the production or manufacturing cycle. |
| Renewable Energy | Increases in the amount of renewable energy generated or used by the borrower. |
| Water Consumption | Water savings made by the borrower. |
| Affordable Housing | Increases in the number of affordable housing units developed by the borrower. |
| Sustainable Sourcing | Increases in the use of verified sustainable raw materials/supplies. |
| Circular Economy | Increases in recycling rates or use of recycled raw materials/supplies. |
| Sustainable Farming and Food | Improvements in sourcing/producing sustainable products and/or quality products (using appropriate labels or certifications). |
| Biodiversity | Improvements in conservation and protection of biodiversity. |
| Global ESG Assessment | Improvements in the borrower’s ESG rating and/or achievement of a recognised ESG certification. |
Why Sustainable Loans Are Crucial for Singapore
Singapore has made sustainable financing a key priority as part of its broader economic and environmental policies. Sustainable loans help to foster responsible business practices and boost
Singapore’s status as a green finance hub5.
While sustainable financing has gained traction, several challenges remain:
Many businesses, especially SMEs, are still unaware of the benefits and opportunities associated with sustainable financing and how the right banking law services can help them unlock such funding opportunities.
Next, it is not easy to ensure accountability in abiding by the principles of sustainability. It can be a challenge to monitoring whether loan recipients meet their ESG commitments requires robust systems for reporting and evaluation, which can be resource intensive. Having a knowledgeable banking and finance lawyer involved can provide clarity.
Examples of Sustainable Loans
The Monetary Authority of Singapore (“MAS”) introduced the first Grant Scheme to Support Green and Sustainability-Linked Loans in the World in 20206.
This grant covers up to S$100,000 of costs incurred by businesses when conducting independent sustainability assessments (i.e. second party verification, certification or rating).
This reduces barriers for companies seeking green or sustainability-linked loans. Furthermore, MAS covers up to S$180,000 of expenses incurred by banks to develop frameworks for green and sustainability-linked loans. In encouraging banks to support small and medium enterprises, parties will support the sustainability initiative by incorporating sustainability principles in their financing.
Most recently, in 2024, MAS enhanced its collaboration with China’s central bank to improve cross-border green finance flows and develop platforms for decarbonization ratings. These initiatives aim to drive regional efforts toward sustainability7.
In 2024, City Developments Limited (“CDL”) secured a S$400 million sustainability-linked loan from DBS Bank. The loan incentivizes CDL to achieve specific ESG milestones, with financial rewards tied to its performance. This approach reflects CDL’s commitment to embedding sustainability into its corporate strategies8.
Meanwhile, OCBC has implemented a financing framework.9 To encourage small and medium-sized enterprises SMEs to adopt sustainable practices, OCBC introduced a framework that simplifies access to green loans. These funds support projects such as energy-efficient construction, renewable energy installations, and sustainable water management, helping SMEs play a part in environmental preservation.
In addition, HSBC has tailored green loans to assist SMEs in improving their sustainability. The funds can be used for renewable energy systems, green building projects, or energy-efficient equipment. Eligibility often requires certifications such as those issued by the Singapore Environmental Council, Singapore Green Building Council or the Building and Construction Authority10.
United Overseas Bank (“UOB”), through its U-Solar and U-Drive Programs, support renewable energy adoption, which finances solar energy projects across Southeast Asia. Its U-Drive program, on the other hand, provides green financing for purchasing hybrid and electric vehicles, supporting a shift towards cleaner transportation11. To elaborate, UOB’s U-Solar programme, launched in October 2019, has enabled the production of nearly 160 gigawatt hours of solar energy across Southeast Asia. This effort has contributed to cutting greenhouse gas emissions by over 77,200 tonnes of CO₂-equivalent, a standard metric for measuring emissions.
Conclusion
To conclude, despite the challenges, the outlook for sustainable loans in Singapore is highly optimistic. With ongoing support from the government and innovative financing solutions from banks, sustainable financing is poised to play
a transformative role in the nation’s economic and environmental future.
This article was authored by our Partner Oon Thian Seng and Senior Associate Angeline Woo.
Oon & Bazul LLP’s Banking & Finance Practice has established a strong reputation with financial institutions in Singapore, particularly with merchant and trade banks. Our expertise in trade and asset finance in shipping and international trade is highly regarded. Our work includes advising on all forms of finance including syndicated, club and bilateral debt financing as well as leasing, export credit financing, seller’s credits, derivatives and other credit enhancement products, bond issues and other forms of capital raising. We are also capable of advising in specialty matters relating to conveyancing, projects & real estate and private client services.
The team has capabilities in both non-contentious and contentious matters, and also assists banks with compliance and regulatory advice in the quickly developing AML/KYC compliance environment.
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9 https://www.ocbc.com/business-banking/smes/loans/sustainable-financing
10 https://www.about.hsbc.com.sg/news-and-media/hsbc-launches-singapores-first-green-loan-for-smes