The rise of sustainability-linked loans in commercial real estate

February 21, 2024

The commercial real estate sector is in the midst of a sea change toward sustainability, with a growing emphasis on ESG criteria. One key driver of this change is the rise of sustainability-linked loans (SLLs), which incentivise the borrower to achieve sustainability-related performance targets.

SLLs first entered the global market in 2017, and their rise has been nothing short of meteoric. Between January 2016 and September 2021, global sustainable lending activity grew from US$6bn to US$322bn—a massive increase with growth exceeding 5200%. ESG investments now represent about 18% of foreign financing for emerging markets (excluding China), and approximately 90% of sustainable lending is comprised of SLLs.

This post will cover what SLLs are and how they work, review current market trends, and explore examples of SLLs at work across different regions. We’ll also discuss how building analytics tools support REITs in meeting the criteria contained with their SLL agreements.

What are sustainability-linked loans?

Sustainability-linked loans are a type of loan that incentivises borrowers to achieve predefined ESG targets. Unlike green loans, which are used to fund sustainable projects, SLLs are not earmarked for particular uses. Instead, the terms of the loan—most notably the interest rate—are linked to the sustainability performance of the borrower. 

While SLLs have existed across industries for most of the last decade, they are increasingly appealing to commercial real estate owners. Using SLLs, REITs can secure loans with more favourable terms than the market average by meeting specific ESG criteria.

How do sustainability-linked loans work?

Sustainability-linked loans facilitate ESG-related growth by using financial incentives to drive action. A few of the mechanisms used include:

  • Sustainability Performance Targets (SPTs): The loan agreement includes targets aligned with ESG criteria. For REITs, these include reduced greenhouse gas emissions, improved energy efficiency, green certifications, or enhanced tenant comfort.
  • Interest rates: The interest rate on an SLL is linked to the borrower’s performance against the agreed SPTs. If the REIT meets or exceeds these targets, the interest rate may be reduced, while failing to meet the agreed targets could result in higher interest rates.
  • Reporting: Borrowers are usually required to provide regular reports on their performance against SPTs, which may require verification from an independent third party to ensure accuracy and credibility.

Common SLL criteria

Since 2017, internationally standardised Sustainability-Linked Loan Principles (SLLPs) have brought structure to the market and provided guidance on the minimum standards required for a loan to earn the SLL label. The SLLPs were published jointly by industry bodies in Europe, Asia Pacific, and the US, indicating their global reach.

In general, SLLs align with the following principles:

  • Green loan principles: Achieving certification under energy efficiency standards such as LEED, BREEAM, or NABERS; sustainable water and wastewater management; waste management and resource recovery.
  • Social loan principles: Tenant engagement and wellbeing; community development; affordable basic infrastructure; access to essential services; affordable housing; employment generation; socioeconomic advancement.
  • Climate loan principles: Climate mitigation; CO2 avoidance; circular economy; climate adaption; pollution control; biodiversity and green space conservation. 

SLL market trends

In 2022, the property sector accounted for more than 8% of the sustainable finance market globally, with issuance to real estate projects reaching US$127bn. According to recent data from PRI, 90% of sustainable lending qualifies as sustainability-linked loans, with green loans comprising a much smaller proportion of the overall market. SLLs have also outpaced green bonds, according to data from the Climate Bond Initiative.

While Europe has been at the forefront of SLL issuance since 2017, their popularity is gaining speed in Australia, the UK, and North America. In Australia, SLLs now comprise up to 44% of the real estate sector's annual loans.

One factor in this global increase is accessibility; SLLs are no longer limited to large, investment-grade corporations. The profile of the average SLL borrower has grown steadily more diverse, with smaller, privately held borrowers participating in the burgeoning sustainable loan market.

Case studies from across the globe

Here are just a few examples of SLLs in action across different regions:

  • Charter Hall Group (Australia): in 2022, Charter Hall announced a further $1 billion in sustainability-linked loans, lifting total sustainable finance transactions across the Group to $2.4 billion. These new facilities were completed by the Charter Hall Office Trust (the Fund) under its newly established Sustainability Linked Loan Framework, offering another opportunity for the business to integrate ESG objectives throughout our operations to deliver long term, risk adjusted returns for investors, and lower operational costs.
  • Growthpoint Properties (Australia): Growthpoint recently converted $520mn of existing debt facilities into an SLL with interest margin reductions tied to the achievement of sustainability KPIs. KPI themes are the decarbonisation of Scope 1, Scope 2, and Scope 3 emissions and performance measured against NABERS and GRESB.
  • Frasers Property (UK): In the UK, Frasers secured a £110 million five-year bilateral SLL, with interest margin reductions contingent on maintaining a four-star GRESB rating.
  • Scape (Australia): Student housing operator Scape has followed up a $1bn+ round of funding with a $1.4bn debt deal tied to green targets, enabling the borrower to convert the debt into sustainable financing. The transaction will motivate Scape to lower emissions and reduce waste.
  • Frasers Property (Australia): Frasers Australia secured a five-year AU$340mn and US$75mn syndicated SLL with a price reduction structure based on sustainability performance targets linked to the Group’s goal to become a net-zero carbon corporation by 2050. This transaction brings the proportion of green or sustainability-linked corporate facilities for Frasers in Australia to 100%.
  • Manulife (US): Manulife US has obtained a five-year US$250mn SLL. Manulife will use the loan for general corporate and working capital purposes, including refinancing existing loans connected to its green building portfolio. Interest rate reductions linked to sustainability performance targets will allow the REIT to save on borrowing costs while working to reduce greenhouse gas emissions.

How CIM’s PEAK Platform helps REITs meet sustainability targets

CIM’s PEAK Platform is helping REITs manage their sustainability targets and improve performance related to SLLs. One leading Australian real estate company partnered with CIM to achieve an ambitious target of 4.5 stars for their NABERS Indoor Environment (IE) portfolio rating. This goal was tied to a significant portion of their substantial sustainability-linked loans in the hundreds of millions, which promised interest rate discounts once the client achieved that target. 

The company encountered a challenge when a core property in its portfolio experienced a drop in NABERS IE ratings due to incomplete temperature log data, poorly positioned sensors, and indoor air quality issues. This issue was severe enough to impact the entire portfolio’s average rating, putting the company’s debt financing strategy at risk. 

By leveraging PEAK’s Indoor Environment module, the company has been able to proactively monitor and manage IE ratings, supporting the company’s financial health and demonstrating its commitment to sustainability. 

They have tagged critical NABERS IE sensors across the portfolio for enhanced monitoring and keep a 24/7 eye on thermal comfort conditions so they can identify and resolve issues promptly. Automated workflow notifications for on-site teams ensure swift fault resolution and an internal NABERS IE reporting mechanism keeps stakeholders informed.


The rise of sustainability-linked loans in commercial real estate is evidence of the increasing interconnectedness between sustainability and financial decision-making. By incentivising borrowers to meet specific ESG targets, SLLs drive positive environmental and social outcomes while providing financial benefits such as reduced interest rates.

As the market continues to evolve, tools like CIM’s PEAK Platform play a crucial role in helping REITs remain competitive and achieve their sustainability goals.

Ready to unlock the potential of your portfolio? CIM's PEAK Platform is a best-in-class building analytics SaaS technology, improving efficiency, sustainability, and tenant comfort. Watch a demo to learn more.

David Walsh
February 21, 2024