Sustainability-linked loans (SLLs) are loans where the interest rate is linked to the borrower’s ability to meet pre-defined sustainability targets. Unlike a ‘green loan’, the project that achieves funding doesn’t have only one main sustainability objective for its use of proceeds. Instead, SLLs provide a general-purpose facility.

Downing said it has referenced the International Loan Market Association (ILMA) SLL principles in creating its framework, and the overarching objective of its SLLs is to incentivise and reward a borrower’s achievement and pre-determined sustainability performance objectives. This is based on a borrower’s sustainability strategy, targets and objectives, which are assessed against an ESG scorecard.

The ESG scorecard used by Downing references the UN Sustainable Development Goals and when completed, Downing assesses it to determine an expected sustainability score at practical completion. Feedback will be provided where Downing highlights potential improvements to the score. For the verification SLL principle, once the scheme has been completed, a third-party assessment of ESG data provided in the scorecard will be undertaken by a specialist sustainability monitoring surveyor.

Parik Chandra, partner and head of specialist lending at Downing LLP, said: “Institutional investors are growing increasingly aware of ESG and sustainability-related risks in the property sector against the backdrop of accelerating climate change.

“More institutional investors and developers are beginning to take note of SLLs as providing another tool for tackling the challenge of reducing embodied carbon in new schemes.”

Recent research with UK pension schemes commissioned by Downing LLP found that 76% expect a greater focus on ESG over the next three years. Furthermore, the study found nine out of ten pension funds believe that lending to support residential property developers will play an important role in helping defined benefit schemes meet their ESG goals and tackle net zero challenges.

Roger Lewis, head of responsible investment at Downing LLP, said: “Net zero carbon by mid-century will require an ambitious economic transition, involving every company, lender, insurer, and investor.

“From residential homes to commercial real estate, buildings hold a significant amount of carbon, both embodied from their materials and by powering heating. Two-fifths of emissions globally are from buildings, split between three-quarters operational and one-quarter embodied.

“This means being realistic about a long-term strategy for achieving net zero. It also means targeting the whole of the economy, and all types of carbon. The growing adoption of sustainability-linked loans (SLLs) for real estate as a major contributor towards labelled debt more broadly can help to raise ESG standards in residential property development.”

Downing LLP typically lends between £1 million and £30m to experienced developers with the ability to go higher by exception. It lends up to 90% loan-to-cost and 70% loan-to-gross-development value.