When Sustainability Is Selected, Not Induced: Bank Incentives and the Credibility of SLLs

We examine the economic incentives and mechanisms underlying banks’ issuance of sustainability-linked loans (SLLs). We show that SLL issuance is dominated by a selection effect: banks disproportionately extend these contracts to borrowers with superior ex-ante credit profiles. Consequently, the lower ex-post default rates observed among SLL borrowers largely reflect inherent borrower quality rather than improvements induced by performance-linked loan features. Turning to market perception, we document a striking temporal reversal. Early SLL issuers attracted deposit inflows—consistent with credible ESG signaling—whereas later cohorts experienced significant deposit outflows amid growing concerns about greenwashing. Finally, we identify three key drivers of SLL supply: bank scale, organizational ESG commitment, and the depth of preexisting borrower relationships. Together, these findings reveal the strategic, credibility-sensitive nature of sustainability-linked lending and challenge the presumption that SLLs systematically generate meaningful behavioral change.