Understanding sustainability-linked loans: The basics for commodity traders

What are Sustainability-Linked Loans?

Sustainability-linked loans (SLLs) are a fast-growing financing option in commodity trading. Unlike traditional green loans, which must be used for specific projects, SLLs offer more flexibility: companies can use the funds however they like, but the interest rate they pay depends on their sustainability performance.

For traders, the principle is simple: hit your sustainability targets, and your interest rate goes down. Miss them, and it goes up. It’s a way to turn better environmental and social performance into direct financial savings, making ESG action part of the bottom line.

How is the SLL market performing?

Sustainability-linked loans reached their peak in 2023, when interest in ESG and corporate sustainability was at an all-time high following the pandemic. Since those highs, the market has dipped and has not yet fully recovered.

Now, we are seeing fewer loans, but at higher values. In 2024, the value of sustainability-linked loans increased to $610 Bn, an increase of approximately 10% on the $554 Bn of SLL transactions in 2023. At the same time, the number of transactions dropped from 898 in 2023 to 736 in 2024 — an 18% drop — showing a growing trend for larger ticket sizes by fewer organisations.

In 2024, there were several notable deals in the commodity trading sector, including:

‍How are SLLs structured?

The structure of an SLL typically includes a standard loan agreement supplemented with sustainability performance targets (SPTs). These targets are customized to a trader’s overall sustainability strategy and typically include goals like reducing carbon emissions across the supply chain, improving energy efficiency in operations, or increasing the percentage of sustainably sourced commodities in a portfolio.

When signing a sustainability-linked loan (SLL), traders should expect to work closely with their lender to set clear, relevant targets. The loan will usually require regular progress updates, and in many cases, an independent third party will need to verify results. This adds credibility to the sustainability performance and helps ensure the loan terms are based on real progress, not just claims.

How are SLLs used in commodity trading?

Traders use sustainability-linked loans (SLLs) to fund the same activities they would with traditional facilities, but with added pressure to hit sustainability goals. The key difference is that the loan terms are tied to performance metrics, like emissions per tonne traded or the share of certified sustainable products. This lets traders secure capital while showing stakeholders they're taking environmental performance seriously — aligning financial and sustainability goals in a single structure.

What can traders expect when implementing SLLs?

Implementing an SLL typically follows a four-stage process: 

1. Establishing baseline performance metrics

The first step is understanding where you’re starting from. This means working with your lender to define and document your current sustainability performance — for example, your emissions per tonne traded, or the proportion of your portfolio that meets sustainability standards. These metrics form the baseline against which future progress will be measured, so accuracy and credibility are key.

2. Setting ambitious yet achievable targets

Once the baseline is established, you’ll agree on targets that are both meaningful and realistic. These targets need to stretch your operations, demonstrating genuine effort, but they must also be achievable within the loan period. Targets might include emissions reductions, supply chain improvements, or shifts in sourcing toward certified sustainable products. The lender and borrower align on these goals early to ensure the loan incentivises real improvement.

3. Implementing operational changes to achieve these targets

With targets in place, it’s time to take action. This could involve switching suppliers, improving logistics efficiency, or using better data to guide sourcing decisions. Traders typically use this phase to embed sustainability into their commercial strategy, ensuring the necessary systems and processes are in place to meet their loan-linked goals.

4. Regular reporting on progress

Throughout the loan period, you’ll be required to report on your progress, typically on an annual basis. This includes updating the lender on how you're tracking against your targets, with many agreements requiring third-party verification of the results. Transparent, accurate reporting helps maintain trust and ensures any financial benefits (like reduced interest rates) are earned through verifiable impact.

What are the key challenges for commodity traders looking to secure SLLs?

1. SLLs are new, and standards are yet to catch up

SLLs are a relatively recent innovation, meaning there are no well-established global standards for their implementation in the commodities market. More broadly, sustainability standards and disclosure requirements around the world are inconsistent and constantly evolving, making it difficult for traders and their banks to know what ‘good’ and ‘achievable’ look like.

2. SLLs may put commodity traders at higher collateral and credit risk

Traders already face high risk when seeking external credit — loans typically require collateral in the form of commodities. In an era of volatile international trade, commodity price volatility can rapidly erode a company’s collateral values and become inefficient to secure the loan, disrupting operations in the process.

SLLs add another layer of risk and complexity to this picture: if traders fail to meet sustainability targets, they may see their borrowing costs rise or their access to credit restricted. While SLLs may make sense on paper, traders should be well aware of the risks before entering into an agreement.

3. Data

Many of the challenges in the world of corporate sustainability come back to insufficient data. In the case of SLLs between banks and commodity traders, data plays a number of roles. Firstly, both sides need access to reliable data in order to establish realistic sustainability targets. Determining what a realistic target looks like requires significant relevant industry data, a thorough benchmarking process, and occasionally third-party verification — all of which takes time (and money).

Throughout the duration of the loan, banks will require high-quality data from traders to ensure they are meeting their sustainability KPIs. Most traders don’t yet have a strong grasp on carbon and sustainability data for their company and supply chain, which makes entering into SLLs challenging at best, and risky at worst.

Should commodity traders embrace SLLS?

The benefits of sustainability-linked loans (SLLs) go beyond just lower interest rates. For traders, using these loans is a way to show investors, customers, and partners that they’re serious about sustainability. That kind of signal can help build trust, boost your reputation, and even open doors to new markets that care about low-carbon sourcing.

If you're new to sustainability-linked loans (SLLs), start by understanding where you stand today. Take stock of your current sustainability performance to spot areas where you can improve. Then, connect with lenders that have experience in structuring sustainability-focused finance. It also helps to bring in experts who understand both emissions data and the realities of commodity trading — they can help you set targets that are both credible and commercially viable.

Getting started with SLLs? CarbonChain can help.

CarbonChain gives commodity traders the carbon intelligence they need to unlock sustainable finance. From setting targets to tracking progress and identifying decarbonisation opportunities, our platform supports every stage of the sustainability-linked loan journey. With automated emissions accounting built for complex trade flows — and the industry’s most trusted dataset — we help traders and banks align on credible, verifiable targets.

Whether you're looking to secure better loan terms, meet stakeholder expectations, or source lower-carbon commodities, CarbonChain makes it possible to act with confidence and compete in a carbon-conscious market.

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