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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Sustainability-linked margin

What is a sustainability-linked margin, and how does it change the interest rate?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A sustainability-linked margin adjusts a loan's margin according to whether the borrower meets agreed sustainability performance targets, such as cuts in emissions or water use, measured by key performance indicators and checked by an outside verifier. The adjustment is usually small: on a US$50m loan, a step of 5 basis points is worth US$25,000 a year. The loan can be used for general purposes, and the Sustainability-Linked Loan Principles of the LMA, APLMA and LSTA expect targets that are ambitious against the borrower's own trajectory, so lenders test whether a target is one the business would have met anyway.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WHAT IT IS NOT

A margin ratchet moves the margin with a financial ratio such as leverage; a sustainability-linked margin moves it with non-financial targets, and some loans have both.

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