Impacts of the balance-sheet treatment on the marketing of ESG-linked loans in the EU
In recent years, the market for ESG-linked loans has grown significantly. According to data from Bloomberg Intelligence, the global issuance volume of ESG-linked loans reached around USD 570 billion in 2023 – up from only USD 70 billion in 2018. In Europe, a substantial share is attributable to the German-speaking region, with companies in the industrial, energy supply, and construction sectors in particular using ESG-linked credit facilities to implement transformation measures. According to a recent ESG strategy report by Deutsche Bank, the ESG-linked loan volume in the EMEA region amounted to around EUR 448 billion in 2023, representing approximately 49% of the global market volume (source: Deutsche Bank Investor Relations, ESG Strategy Report, June 2024).
This form of financing offers borrowers incentives to improve their sustainability performance and serves lenders as an instrument for the strategic management of ESG risks.
From the perspective of IFRS accounting, however, such structures have so far been associated with considerable challenges. A key issue was whether these ESG-dependent interest rate adjustments met the requirements for measurement at amortized cost. Under IFRS 9, the cash flows of an instrument must pass the so-called SPPI test (“solely payments of principal and interest”) for measurement at amortized cost to be permissible. ESG interest mechanisms were often considered “not purely cash flow–based” and thus fell under fair value through profit or loss (FVPL) measurement.
It is also noteworthy that this accounting issue is relevant for banks with HGB (German GAAP) single-entity financial statements – particularly when their customers report under IFRS. For IFRS-reporting companies, FVPL measurement on the liability side (pursuant to IFRS 9.4.2.1 in conjunction with B4.3.8) meant that ESG-linked loans had to be recognized in the balance sheet at fair value. This led to volatility in financial results and frequently raised concerns regarding transparency, predictability, and earnings stability. In this way, IFRS rules indirectly influenced the product design and marketability of sustainable financing in Germany, even if the bank itself did not prepare IFRS financial statements. The result: despite their substantive added value, ESG-linked loans were often perceived as problematic from an accounting perspective – and frequently avoided.
Particularly affected were larger mid-sized companies and listed entities that, while reporting under IFRS, often pursued a conservative internal financial reporting approach – such as family-owned groups, municipal holding companies, utilities, or listed industrial companies with a strong focus on planning stability. These companies place great importance on a stable financial result to avoid jeopardizing dividend policies, covenants, or analyst expectations through valuation fluctuations.
With Regulation (EU) 2025/1331 of 9 July 2025, amendments to IFRS 9 and IFRS 7 have been incorporated into European law. These changes stem from the IASB’s efforts to reflect the growing relevance of ESG factors in financing agreements without creating accounting disadvantages for such structures. They incorporate clarifications from the IASB’s 2023 amendment and specify the treatment of ESG-related contractual cash flows.
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