The City of Gothenburg has emerged as a trailblazer by becoming the first local government worldwide to secure a “sustainability linked loan” (SLL). This novel transformational financing is tied intimately to measurable, concrete annual environmental and social commitments. These targets are set by way of a contract between the borrower and their lenders. The process The city spent an entire year negotiating this precedent-setting SLL. They worked closely with the six largest banks in the Nordic countries, with SEB taking advantage as the lead lender. This decision highlights Gothenburg’s ongoing commitment to sustainability, even as the world sees a downturn in issuance of such green loans.
The SLL is more than a financial instrument, it’s a promise to achieve quantifiable improvements. In Gothenburg, we are increasing the percentage of women leaders in our organization by 16%. With this initiative, we are looking to reduce total employee turnover by at least 6%. These binding targets provide the backbone to support the city’s broader environmental and social equity goals. They’ll remain in effect through 2030. Failure to meet these targets can lead to hefty financial penalties. Such a law would help the city avoid a growing risk of reaching a 150,000 kroner penalty for failing to reach its renewable energy target by 2024.
Mats Olausson, SEB senior sustainability advisor was clear that loans like these must have ambition behind them.
“You run the risk of being pulled into the dirt for having not done a good enough job.” – Mats Olausson, senior sustainability advisor
At the same time, Emagine – a Danish management consultancy – has taken the plunge into SLLs. In 2021, the company took out a £10 million loan and used the money to purchase six other companies around the world. Similar to Gothenburg, Emagine’s SLL also includes targets for increasing female leadership and decreasing employee turnover. By achieving these goals, Emagine enjoys lower interest rates as a reward.
Lars Bloch, Emagine’s chief financial officer, highlighted the dual nature of these loans: both opportunity and risk.
“If we didn’t meet the goals, we would be landed with interest penalty rates.” – Lars Bloch, chief financial officer
The share of SLLs issued globally has tanked. In 2023, it has suffered an unprecedented 56% drop, according to Bloomberg. This trend foreshadows a risky, uncertain future for these financing models and for many sustainability initiatives they support.
“We also accept that failing to meet sustainability targets could harm the firm’s reputation, as we have made a public commitment.” – Lars Bloch, chief financial officer
Yet the City of Gothenburg refuses to back down from its promise. The city’s extensive yearly SLL reporting is impressive and adds to the transparency. It demonstrates to your future investors the kinds of positive, measurable impacts their money can have. Lars Block, a portfolio manager at Gothenburg, explained this approach.
Block joined Next City to further explain his role in packaging the city’s innovation and sustainability efforts in ways that would attract investors.
“Banks want to give money to sustainable cities, so packaging up our progress in our SLL reporting is how I make the city beautiful for investors,” – Lars Block, portfolio manager
Block further elaborated on his role in making the city’s sustainability efforts appealing to investors.
“I can’t change the credit worthiness of the city, but I can change how investors look at our sustainability work, and make it more attractive to them.” – Lars Block, portfolio manager