The Private Debt Investor article, “Deep dive: Credibility on the line", quotes Baringa's Emily Farrimond the credibility of sustainable finance. The article is excerpted below.
Having exploded onto the scene in the broadly syndicated market, the impact of sustainability-linked loans is now being felt in private debt. But managers need to make sure they do not stand accused of greenwashing.
Aside from widespread adoption, the biggest challenge for SLLs at the current time appears to be credibility. “I think it’s a major problem,” says Emily Farrimond, a partner and ESG and sustainability lead at Baringa Partners, a London-based consultancy.
“Out of $65 billion-worth of lending I looked at, around half of it was questionable in its claim to be sustainable. Some of it was revolving credit facilities, which were in no sense being used to drive a sustainable outcome. Taxonomies are going to be increasingly important in assessing inbound greenwashing risk.”
Farrimond highlights other weaknesses she has found, including: the dominance of environmentally-focused KPIs, meaning social aspects are going largely ignored; a lack of transparency, with information about SLLs being kept between the borrower and the lender rather than being made publicly available; a lack of climate transition plans (Farrimond thinks it’s illogical to offer SLLs without one); and, in some cases, management not being sufficiently incentivised to bring about action on climate change.
Nonetheless, with the private debt market having only recently come to the SLL party, it seems reasonable to suggest that teething troubles are not too surprising. For the time being, investors appreciate the small steps forward. Before much longer, they are likely to become more demanding.