Introduction

In recent years, the rise of environmental, social and governance (ESG) debt instruments and sustainability-linked loans has been meteoric. According to one dataset, global ESG assets under management reached an estimated US$35.3 trillion in 2023, representing around 40 % of total assets under management.   Meanwhile, the issuance of labelled sustainable debt (green bonds, sustainability-linked loans, etc.) exceeded US$1.6 trillion in 2021 alone.  
Yet as this market expands, so too does scepticism: Are borrowers and lenders genuinely aligned with sustainability goals, or is much of this simply purpose-signalling under the guise of good intentions? This article examines the question of whether ESG debt and sustainability loans represent meaningful change — or merely “green illusions”.

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The Promise of ESG Debt and Sustainability Loans

At their best, ESG debt products — including green loans, sustainability bonds and sustainability-linked loans (SLLs) — are designed to channel capital toward projects or companies that advance environmental or social objectives. For example, a green loan restricts use of proceeds to specified green purposes, while an SLL may tie a borrower’s cost of capital to achievement of pre-agreed sustainability performance targets.   Supporters argue that these instruments can align financing with the transition to a low-carbon, socially inclusive economy.
Consider the numbers: the issuance of “sustainable debt” (covering green, social, sustainability, and sustainability-linked instruments) was recorded at US$1,740 billion in 2024, a 12 % increase on 2023.   This suggests that the demand and supply of such instruments remain significant despite some headwinds.

The Reality Check: Are We Paying for Purpose or Paying for a Label?

Despite the promise, several red flags merit attention.

First, many sustainability-linked loans allow the borrower to use proceeds for general corporate purposes, rather than strictly dedicated green or social investments.   That weakens the direct linkage between capital raised and meaningful outcomes.
Second, scrutiny is growing regarding whether the sustainability targets embedded in SLLs are sufficiently ambitious or verifiable. According to one analysis, issuance of SLLs fell by 56% in 2023 and is down 74% so far in the current year, reflecting growing concerns about credibility.  
Third, transparency is still lacking in many markets. For example, in some jurisdictions regulatory frameworks for ESG-labelled debt remain underdeveloped, raising the risk of “greenwashing” — where labels are used more for marketing than real impact.  
Finally, the question of cost advantage remains open. While some issuers claim “greenium” (a lower interest cost for labelled debt), others caution that additional auditing and verification costs may offset the benefit.  

Market Dynamics and Risks

The shifting landscape of the sustainable debt market further underscores both opportunity and risk. The bulk of sustainable lending in 2023 was dominated by SLLs, which comprised approximately 86 % of global sustainable lending volumes as of September 2023.   At the same time, green loans (loans where proceeds are restricted to green projects) make up a smaller share and have seen more volatility in issuance.  
Moreover, the regional distribution of ESG-labelled lending and borrowing is uneven. For example, between 2017 and 2022 the United States accounted for the largest single country share of green and sustainability-linked loans, while emerging markets remain under-penetrated.  
The risk for borrowers and lenders alike is that as regulatory scrutiny increases and investor expectations evolve, some past transactions may be exposed as failing to meet the spirit of their ESG labels. The delay or retreat of substantive climate regulation in some major jurisdictions has already triggered investor caution.  

What Borrowers and Lenders Should Ask — and Demand

For businesses (borrowers) and financial institutions (lenders) engaging in ESG debt or sustainability loans, the following considerations are critical to ensure that purpose is real rather than illusory.

Borrowers must ask how their sustainability targets are structured: Are they outcome-based? Are they ambitious? Are they independently verified and tied to meaningful KPIs? Also critical is clarity on how loan proceeds will be used, and how performance will be measured and enforced.
Lenders should demand robust documentation and reporting frameworks: Are the sustainability targets aligned with recognised frameworks and taxonomy? Is there a clear “ratchet” or financial incentive tied to performance? Are the audit or verification mechanisms credible?
Both parties should consider whether any “premium” paid or gained from labelled debt is justified by genuine additionality — meaning that the financing is enabling more sustainable activity than would have occurred otherwise — rather than simply reclassifying existing business as “sustainable”.
Finally, they must monitor how broader market and regulatory developments may affect the underlying assumptions of ESG debt. For example, changing regulation, investor sentiment, or sector-specific transition risk may alter the value and credibility of ESG-labelled instruments.

The Future: Scaling Credibility Over Volume

As the market matures, the emphasis must shift from volume to credibility. Issuance of sustainable debt is no longer sufficient — the question is now whether such instruments deliver tangible outcomes. Data suggests that while the scale of issuance remains significant, the share of sustainable lending as a proportion of total lending is still relatively modest — for instance, only around 6 % of total lending activity was considered sustainable in 2023.  
Regulators are taking note. In India, the Securities and Exchange Board of India (SEBI) issued a framework in June 2025 to regulate ESG debt securities, excluding green bonds, aimed at curbing “purpose-washing”.   This trend signals a tightening regulatory regime that may reward high-integrity issuers and penalise weaker ones.
For the broader financial ecosystem, the next stage of sustainable debt growth will depend on standardisation — common definitions and taxonomy, consistent verification protocols, transparent reporting, and alignment with real-world transition pathways. Without that, the risk is that sustainability loans become a marketing label rather than a meaningful financial tool for change.

Conclusion

The concept of ESG debt and sustainability-linked loans holds genuine potential: to align capital flows with sustainable transition, fund socially beneficial initiatives and encourage corporate accountability. The statistics tell an impressive story of growth and investor interest.
Yet for many borrowers and lenders, the real question is whether they are genuinely paying for purpose — or simply buying a label. As issuance volumes grow and market participants become more discerning, the premium on authenticity, transparency and impact will only increase. The market is evolving from “green ambitions” to “green accountability”.
For business leaders, financial institutions and investors alike, the challenge is clear: engage not just in the mechanics of labelled debt, but in the substance behind it. In that way, sustainability loans may fulfill their promise — rather than serve as another gloss over conventional finance.
As the sustainable debt market enters its next phase, success will depend less on how much is issued, and more on how well it performs.