Sustainability-linked loans and the transition to more sustainable agrifood systems

Agrifood systems are under growing pressure to reduce greenhouse gas emissions, protect biodiversity, improve water stewardship and ensure more sustainable production practices. Financial institutions are increasingly expected to support this transition by integrating sustainability considerations into lending decisions.

One financial instrument gaining traction is sustainability-linked loans (SLLs), with USD 327 billion worth of SLLs issued in 2023. “Born” in 2017, SLLs have become the second largest sustainable debt instrument after green bonds. Between 2017 and 2023, about 5 percent of global SLL issuance targeted the agrifood sector. This is above the sector’s share in conventional syndicated lending (estimated at 3 percent), which reflects the relevance of SLLs for agrifood systems. Yet significant untapped potential remains, particularly in emerging markets and developing economies, where financing needs across agrifood value chains remain substantial.

A new study by the FAO Investment Centre, co-published with the European Bank for Reconstruction and Development (EBRD), titled – Integrating sustainability-linked loans into agrifood finance – explores how SLLs can support the transition towards more sustainable agrifood systems. As development finance institutions are showing a growing interest for innovative finance solutions, how can an instrument like SLLs be adapted to the realities of financing agrifood systems in low- and middle-income countries?

Unlike traditional green finance, SLLs do not restrict how the loan proceeds are used. Instead, the cost of the loan is linked to the borrower’s achievement of predefined sustainability performance targets such as reducing emissions, improving resource efficiency or increasing sustainable sourcing.

The study finds that SLLs are particularly relevant for the agrifood sector. Sustainability improvements in agrifood systems often occur at the level of companies and supply chains – involving farmers, processors, logistics providers and retailers – rather than through a single investment project. At the same time, agrifood companies frequently rely on working capital financing, which traditional green project-based instruments struggle to address.

Drawing on market data and practitioner experience, the study reviews the evolution of SLL standards, examines the types of sustainability targets most commonly used in agrifood transactions, and discusses practical challenges such as key performance indicators, baseline measurement and verification.

It concludes with ten practical recommendations for financial institutions, development lenders and policymakers on how sustainability-linked lending can support the transformation of agrifood systems more effectively, while maintaining credibility and measurable impact. In a sector as diverse and complex as agrifood systems, sharing learnings and best practices, adapting to the specificity of different value chains, and providing tailored technical assistance support will be key to scaling up.

This analysis adds to the FAO Investment Centre’s growing knowledge portfolio on innovative finance solutions in collaboration with key partners like the EBRD, World Bank, European Union, European Investment Bank and others.