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In recent years, there has been a significant increase in the issuance of sustainability-linked loans (SLLs), where loan contract terms depend on the borrower's ESG performance. This study investigates the economic motivations behind SLL agreements. Our analysis reveals no reduction in loan spreads for SLLs, nor any improvement in borrower ESG performance following the initiation of an SLL. However, we observe that SLL lenders successfully attract higher deposits after issuance, enabling them to increase their lending. However, we find no evidence to suggest that lenders offer SLL contracts predominantly to low-risk borrowers. Our results imply that the primary incentives for engaging in SLL contracts may reside with the lenders, who appear to reap the majority of benefits from such arrangements. Consequently, these findings call into question the purported objectives of SLLs in promoting sustainable practices.

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