Financial Innovation via Sustainable Lending

We examine the incentives that drive banks to introduce Sustainability-Linked Loans (SLLs). By analyzing a comprehensive dataset of banks leading these deals, we find that multinational banks, especially top players in the global syndicated markets, are more likely to offer SLLs than domestically focused banks. While multinational banks are more inclined to offer SLLs in their home markets, their international expansion strategies prioritize economically important credit markets, where they hold leading market positions but face stagnating growth. Leading an SLL transaction, particularly by taking on a prominent role as a sustainability agent, strengthens foreign banks’ market positions in local syndicated loan markets. This is achieved by retaining relationship borrowers and attracting new clients, even though such activities contribute little to banks’ profitability. Our findings underscore the strategic motivations behind banks’ introduction of SLL products, highlighting their efforts to maintain a competitive edge in global syndicated mark