December 14, 2022 - On November 29th the LMA hosted its inaugural Sustainable Finance Conference in London – the first of its kind for the loan market. Two things were clear about the day’s attendees – they want to see one another in person and they are interested in all things in “sustainable finance”. The conference room was packed all day as panelists and speakers waxed philosophical on the key trends and issues in sustainable finance. Taking a cue from COP27, transition finance – financing the climate transition – was a hot topic. Transition finance is critical to the transition, particularly for hard to abate sectors, but where to draw the line can be challenging. For this reason, transition finance often has different meanings for different people. In the absence of a common definition, panelists emphasized the need for transparency on the use of proceeds for a transition financing so lenders can determine for themselves whether the characteristics of the loan meet their own requirement. While the development of a transition label is necessary in the minds of many, it is tricky. For now, market participants look to the ICMA Transition Finance Handbook for bonds and soon will look to the transition finance guidance being developed by the loan market trade associations for loans. Importantly, the most popular flavor of sustainable finance – the sustainability linked loan (SLL) – is a useful transition finance tool. SLLs are designed to align a borrower financing with its plans to transition to sustainable business model. These loans are tailored to the borrower – its business, where it is in its transition plans – and so can be broadly available so long as the borrower has developed a sustainability strategy and identified core metrics that it will use to pursue that strategy. The popularity of these financings also underscore the need for ESG reporting by the borrower. The availability and quality of ESG data in the loan market was a major theme of the day. The LSTA’s Tess Virmani was delighted to join the LMA and highlight current industry efforts to advance ESG reporting. The recently launched ESG Integrated Disclosure Project, of which the LSTA is a founding organization, is the biggest to date market-led endeavor to establish a baseline of ESG information across credit markets globally. This industry initiative has developed a single, industry template for the borrower to share ESG information with prospective lenders when entering into a loan. Support for this initiative continues to grow. Organized by the LSTA, Alternative Credit Council and UN Principles for Responsible Investment, the ESG IDP is supported by CDP, LMA, ESG Data Convergence Initiative and, as of this week, the ICSWG-US, which represents the interests of asset owners. For more information on the ESG IDP, please read our past coverage. LSTA members can expect to hear a lot about the ESG IDP in 2023 and members are encouraged to reach out to Tess Virmani for more information.
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