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01 December 2021 2 min read

Sustainability-linked loans take off but remain a work in progress

The Private Debt Investor article, “Sustainability-linked loans take off but remain a work in progress," quotes Baringa's Emily Farrimond on the necessity to increase transparency in sustainable finance. The article is excerpted below.

Private Debt Investor

The market for sustainable finance is growing fast as credit funds line up to offer sustainability-linked loans (SSLs) in response to sponsor and investor demand. Yet while borrowers benefit from cheaper debt on the back of ESG-linked margin ratchets, fears that the market is falling down on transparency threaten to damage credibility and suggest there is still some way to go before sustainable finance starts making an impact.

Management consultancy Baringa Partners recently conducted an analysis of a sample of 10 SLLs totalling circa $35 billion to a diverse pool of large, multi-region corporate borrowers. They found as many as half of those loans could be open to accusations of greenwashing. A fifth of the loans went to firms that had no publicly stated sustainability targets associated with the loan, while only half of the SLLs revealed how the targets set would be measured or externally validated.

Emily Farrimond, partner and ESG and sustainability lead at Baringa, says: “These loans are really positive when they are put in place to specifically drive some kind of sustainability outcome. The loans that are there for a specific point of transition, to support a borrower going from brown to green and with the potential pricing differential enabling the company to do that more quickly and efficiently, are a positive development. But we found a lot of this lending wasn’t tied to science-based targets and, where there were targets, those were often not tracked or reported on.”

Farrimond says there should be some minimum requirements if credit managers are considering lending on this basis: “First, there should be alignment with the LMA’s principles, with good clear and robust science-based targets in place that are going to be actively managed and monitored on an ongoing basis, and probably renegotiated as well.

“Then, it is about working out what the additional baseline requirements are. Is having a credible transition plan an entry-level requirement for a borrower? Or if they don’t have one, are you going to support them with getting one pretty quickly?”

Finally, Baringa says lenders must be prepared to proactively demonstrate to the market that sustainable lending has been done on a robust basis. A consultation paper from the Financial Conduct Authority is expected soon and it is likely the regulator will expect that transparency as a minimum, says Farrimond.

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