Sustainability-linked loans (SLLs) only emerged about five years ago, but these financial instruments to promote the attainment of environmental goals have already become big business.

The idea is simple: a company or organisation is given access to financing on the condition that they will meet a set of predetermined sustainability targets. Failure to achieve them will cause their lending facility to become more expensive, while meeting or exceeding their targets makes it cheaper.

Originally considered a somewhat niche form of financing, SLLs quickly became mainstream after more lenders entered the market and rates came down, eventually spilling over into the public sector, which has been responsible for hundreds of billions of pounds of financing deals in recent years.

There is a huge appetite among lenders to facilitate such deals, yet one area that has been surprisingly slow to take up SLLs is the higher education sector.

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Universities are inherently well placed to benefit from loans that are tied to a set of targets related to environmental, social and governance (ESG) issues. This is not only because of their need to access low-cost funding, which is usually a feature of these funding arrangements, but also to meet the demands of their customer, the student.

A by accommodation provider found that students are more concerned about climate change than other issue. So significant is their dismay, in fact, that more than a third said they would support universities¡¯ fining students who act in a way that is not sustainable. Further, the campaign group People & Planet, which publishes a yearly ranking of university performance on climate issues, that more than half of UK universities have failed to meet their carbon reduction targets, leading to calls for the sector to drastically increase efforts, with immediate effect.

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SLLs would actually make doing so profitable, so why are they so rare among universities¡¯ borrowing portfolios? One possible reason is that university funding often faces great scrutiny and, therefore, finance directors worry that should they fail to meet financial targets, they will face criticism for being wasteful of student and taxpayer money. Although the use of public funds is much more prevalent in the public sector, its attitudes and practices around financing are markedly different. Perhaps, alternatively, the several high-profile accusations of university greenwashing that have occurred in recent years have made universities less willing to put their heads above the parapet and step into unknown territory.

The required cultural shift will probably happen in the higher education sector, as it has done in other industries, with a small group of pioneers pinning their colours to the mast and seeing success.

There has been a recent move to codify and standardise the essential elements of SLLs, and individual banks have established their own policies, all of which is helpful. Further, in January, Lancaster University took out a , which will be used to fund a bursary for students from low-income backgrounds. And in 2021, UCL took out a ?300 million SSL. Along with the small handful of similar deals that have taken place across the sector, this will give sustainability-linked learning further credibility.

Ultimately, universities,?like all other organisations, are going to find that sustainable finance becomes impossible to ignore. In the medium to long term, I think the trend for sustainability-linked finance will make it impossible ¨C or, at least, extremely unattractive ¨C to source funding without some kind of green element (or a clear demonstration that borrowers are capable of decarbonising without such facilities). Gradually, funders and investors will shift away from non-ESG-focused borrowers and, rather than incentives being offered for those borrowers who identify and then meet ESG metrics, penalties will be imposed on those who do not. Within investment funds, some models suggest that ESG funds will actually outnumber conventional ones by as early as 2030.

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Those institutions that have failed to familiarise themselves with such financial facilities, or are tied into long-term facilities?with no environmental features, may find themselves on the back foot. Universities would do well to get in early, while the rewards are still available ¨C as well as while containing global temperature rises to sustainable levels is still possible. In other words, for finance that doesn't cost the planet, act now.

Geoffrey McGinley is legal director in Addleshaw Goddard¡¯s social, sustainable and green finance team.