Sustainability-Linked Loans: What the Banks Actually...

Banks want an emissions KPI that an independent verifier will sign off each year, calculated the same way as the reference value in your facility documentation. That verified number is what earns the margin discount.

The Australian sustainability-linked loan market has grown from a handful of pilot deals in 2019 to multi-billion dollars of new issuance per year by 2025. Most major Australian banks now offer SLL structures, and most ASX 200 borrowers with substantial debt facilities have at least considered one. The pricing benefit is typically a 5 to 15 basis point margin reduction for hitting agreed sustainability performance targets, with a corresponding penalty for missing them.

On a $500m facility at 15 bps, that's $750,000 per year in saved interest. Over a five-year facility tenor, $3.75m. The deal economics work even if the underlying decarbonisation requires modest capital investment.

The trap is the data. Sustainability-linked loans require independent verification of performance against targets, and the Sustainability Linked Loan Principles issued by the APLMA, LMA and LSTA make verification non-negotiable. Borrowers who haven't built audit-grade emissions data find that they qualified for the discount but can't prove it.

What you sign up to in an SLL

A sustainability-linked loan is a general corporate purpose facility (revolver, term loan, or syndicated facility) where the margin is linked to performance against pre-agreed sustainability performance targets. The typical structure:

Reference value: Baseline measurement of the KPI in a defined base year
Sustainability performance targets: Specific, time-bound thresholds the borrower commits to
Margin adjustment: Step-down (or step-up) based on whether targets are met
Reporting frequency: Usually annual, sometimes quarterly
Verification requirement: Independent third-party assurance of the KPI value

KPIs vary widely. The most common in Australian SLLs:

Scope 1 and 2 emissions reduction (absolute or intensity)
Scope 3 emissions reduction for select categories
Renewable electricity percentage
Water intensity
Workplace safety metrics (TRIFR)
Diversity metrics

Carbon KPIs are the most common single category. They're also the hardest to get right, because the data demands compound year on year.

Why the data is harder than the borrower expects

When an SLL is being negotiated, the bank's sustainable finance team and the borrower's CFO agree on a baseline emissions number. That number gets written into the facility documentation as the reference value. Every year thereafter, the borrower has to produce a comparable number against the same scope, methodology, and assurance level.

The first problem: the baseline number is often produced by an external consultant in a one-off engagement. It's not based on a continuous emissions ledger inside the borrower's systems. When year two comes around and the consultant has moved on, the borrower's own team can't reproduce the calculation.

The second problem: methodologies update. The NGA Factors update annually. State grid emission factors change. AR5 GWP values give way to AR6. The reference value was calculated under one methodology, and the comparison year is calculated under another. The numbers diverge. The verifier has to assess whether the comparison is like-for-like.

The third problem: scope changes. The borrower acquires a new business unit, divests an existing one, or reorganises operating structure. The KPI scope has to be adjusted, or the reference value has to be restated. The facility documentation rarely anticipates this in detail, and the negotiation with the bank to agree the restatement methodology can take months.

What the verifier tests before you get the discount

The Sustainability Linked Loan Principles require external verification of the KPI value against the targets at least once per year. The verifier (typically a Big 4 firm or a specialist sustainability assurance practice) runs a process similar to limited assurance under ASSA 5010:

Methodology review: Is the KPI calculated using the methodology specified in the facility documentation?
Source data testing: Does the calculation tie back to invoices, meter data, or other source documents?
Boundary check: Does the scope match what's defined in the loan documentation?
Comparison: Is the comparison to the reference value methodologically consistent?
Evidence pack: Does the borrower have documented evidence to support every adjustment, exclusion, and assumption?

If any of these fails, the verifier issues a qualified opinion or refuses to issue an opinion. The bank then has a contractual issue: the borrower hasn't met the verification requirement, even if the underlying performance was good.

Setting a reference value you can beat and reproduce

In our view, the highest-risk part of an SLL is the reference value. It's the number the borrower has to beat, every year, to earn the discount. If it's set too low (overly ambitious), the borrower pays the penalty year after year. If it's set too high (lenient), the bank's sustainable finance team won't agree to the structure.

The reference value calculation typically uses one of two approaches:

Single base year. Pick a financial year (usually the most recent complete one before the loan is signed) and use that as the comparison point for all future periods. Simple to communicate, but vulnerable to anomalies in the chosen year.

Trailing average. Use a 3-year trailing average to smooth out year-on-year variation. More robust but harder to recalculate when scope changes.

Whichever is chosen, the underlying source data has to be reproducible. If the reference value comes from a one-off consulting exercise that summed up utility bills the consultant tracked down from various inboxes, you have a problem. The auditor can't reproduce a calculation that was never properly documented.

The borrowers who do this well have the reference value calculated from a continuous emissions ledger that already exists for NGER reporting and AASB S2 disclosure. The SLL number is a derivative of the ongoing data discipline. Not a separate process.

Making your SLL number match your AASB S2 disclosure

For ASX 200 borrowers, the SLL emissions number now appears in two places: the loan reporting cycle and the AASB S2 disclosure. The two have to reconcile.

If the SLL says Scope 1 and 2 emissions are 245 kt CO2-e for the reporting period, and the AASB S2 disclosure says 252 kt CO2-e for the same reporting period, the bank's lender team and the company's auditor will both notice. One of the numbers is wrong, or there's a methodology difference that has to be documented.

The cleanest resolution: pick one methodology, apply it consistently, document the basis of preparation. AASB S2 paragraph 29(a)(iii) requires disclosure of the measurement approach, inputs and assumptions. The SLL facility documentation should reference the same methodology. If both call it out the same way, the numbers match.

The complication: SLL facilities were often signed before AASB S2 came into force, with their own methodology assumptions baked in. Borrowers refinancing or extending those facilities now have an opportunity to align the SLL methodology with AASB S2 going forward. Many haven't.

Which KPIs earn the discount most reliably

Banks evaluate SLL KPI proposals against the SLL Principles, which require KPIs to be:

Material to the borrower's core business
Strategic and significant (not peripheral)
Quantifiable with a reliable measurement methodology
Externally verifiable
Benchmarkable against industry standards or science-based pathways

A retailer proposing "scope 3 category 1 emissions intensity per dollar of revenue" is quantifiable but the data quality is questionable because it's typically spend-based with high uncertainty. A construction contractor proposing "diesel intensity per dollar of contract value" is more defensible because the diesel data comes from fuel cards and dockets.

In our view, the strongest KPIs for Australian SLLs are:

Scope 1 absolute emissions reduction (for diesel-heavy businesses)
Scope 2 market-based emissions intensity (for electricity-heavy businesses with PPA strategies)
Embodied carbon per project (for construction)
Operational waste diversion (for retail and hospitality)

The weakest:

Vague "carbon footprint" KPIs without scope definition
Spend-based Scope 3 KPIs that swing with inflation rather than physical activity
Aggregated ESG scores from third-party rating agencies (Sustainalytics, MSCI ESG)

The latter creates an SLL that pays for ratings outcomes rather than emissions outcomes. Many banks have moved away from this structure.

What the SLL audit pack needs to contain

For each annual reporting cycle, the verifier expects:

Item	Source
Reference value calculation file	Original methodology document
Current period KPI calculation	Live emissions ledger
Source data evidence (invoices, meter data)	Document repository
Methodology note	Basis of preparation document
Adjustment register (M&A, restructure)	Change log
Internal control attestation	Sustainability or finance signoff
Reconciliation to AASB S2 / NGER	Cross-framework reconciliation

The reconciliation to AASB S2 is the new piece. Five years ago an SLL stood alone. Today it sits inside a regulated disclosure regime, and the verifier expects the SLL number to tie to the published Scope 1 and 2 disclosure.

Keeping the discount every year

Sustainability-linked loans deliver real economic benefit if the data discipline supports the verification. Borrowers who treat the SLL as a one-off consulting deliverable each year tend to lose the discount or fail verification. Borrowers who treat the SLL number as a derivative of a continuous emissions ledger tend to earn the discount consistently and are well placed for verification.

We've covered before why a continuous emissions ledger pays for itself. For SLL borrowers the payoff is direct: every basis point of margin reduction depends on the verifier accepting the number, and the verifier is far more likely to accept the number when the audit trail holds up.

The result to aim for is one SLL KPI each year that ties to your AASB S2 disclosure and traces back to source invoices. Carbonly is designed to calculate both from the same emissions ledger. If you want to check whether your data can produce a verifier-ready KPI, email hello@carbonly.ai or join the waitlist.