Green gains: The impact of REITs' environmental performance on sustainability-linked loan interest rates

• REITs' emission reductions boost their likelihood of securing SLLs. • A 1% drop in emission intensity raises the SLL selection probability by 29.6%. • SLL interest spreads respond to REITs' decarbonization efforts, unlike non-SLLs. • Banks prefer SLLs for REITs with established sustainability strategies. This paper examines the relationship between environmental performance and the use of sustainability-linked loans (SLLs) by U.S. real estate investment trusts (REITs). We find that a 1% reduction in past carbon emissions increases the REITs' likelihood of taking an SLL by 29.6%, while a 1% slower growth in past emissions reduces the interest spread by 1.69 basis points. Our results reveal that banks reward REITs' previous environmental record through SLLs, whereas non-SLL interest spreads remain unaffected. These findings underscore the importance of explicit sustainability-linked financial instruments in incentivizing decarbonization efforts within the real estate sector.