A number of global financial organizations have rolled out new sustainability principles amid efforts to develop and grow a sustainable lending market.
The London-based Loan Market Association, together with the Loan Syndications and Trading Association in the U.S. and the Asia Pacific Loan Market Association, have launched Sustainability Linked Loan Principles, or SLLPs, which are voluntary guidelines aimed at market participants seeking to improve their understanding of what constitutes sustainability lending. One aim of the principles is to create an environment that gives lenders incentives to encourage borrowers to improve their sustainability profiles by aligning margins and other loan terms to pre-agreed sustainability performance targets.
The principles are based on:
- Corporate social responsibility. A sustainable-loan borrower should provide lenders with insight into its CSR objectives while also disclosing standards or certifications.
- Performance targets that a borrower and its lender group of each transaction negotiate.
- The borrower making readily available up-to-date information about the performance targets, such as external ESG ratings.
- External review, which should be agreed to on a deal-by-deal basis.
Financial institutions and trade bodies have stepped up efforts in recent years to create principles for the embryonic sustainable and green lending market. In 2018, the LMA introduced the Green Loan Principles to define a loan as green if the proceeds are used for clear environmental benefits. The LMA's work builds upon the Green Bond Principles of the International Capital Market Association. The Climate Bonds Initiative, a not-for-profit facilitating climate change-related funding, also provides an extensive taxonomy and certification for green bonds.
READ: Banks need to join forces to stop oil, shale businesses shopping around, says BNP
"Investors are increasingly concerned with the impact of their investment decisions on the environment," Lee Shaiman, executive director of the LSTA, said. "We believe that the framework will help both borrowers and investors as they look to match investment goals and capital needs."
Lobbying efforts are also focused on developing sustainable collateralized loan obligations, or CLOs, as another source of funding for sustainable projects worldwide. While the European market saw two ESG-compliant CLOs from Permira Debt Managers in 2018, there is a need to grow this market globally, experts say. The G-20 Sustainable Finance Study Group, co-chaired by the Bank of England and the People’s Bank of China, published a white paper in late 2018 that called for a sustainable CLO market to tackle climate change, while noting the need to raise $100 trillion in sustainable energy infrastructure funds over the next 15 years to achieve the goals of the Paris Agreement.
The vision is that sustainable CLO funds could become the buyers of sustainable loans and bonds originated by bank lenders. This allows banks to shift such loans from their balance sheet into CLOs, which in turn frees up capital to originate new sustainable loans.
In the European Union alone, hitting Paris Agreement-aligned energy and climate policy targets will require an additional annual investment of €180 billion between 2021 and 2030, the European Commission said in a March 21 statement. Increasingly stretched public funds will not meet those investment needs alone, it added.
LCD is an offering of S&P Global Market Intelligence.