September 19, 2019 - That is the question answered by the sustainable finance panel at the 25th Annual Refinitiv LPC Loan Conference. Moderated by Maria Dikeos (Refinitiv LPC), the panel explored the recent growth of sustainability-linked loans (or ESG loans) in the U.S. Panelists included Sean Colvin (Louis Dreyfus), Gary Herzog (Credit Agricole), Carolyn Kee (Citigroup), Claire O’Connor (Barclays Capital), Cara Younger (BBVA) and Tess Virmani (LSTA). The speakers outlined the benefits that these loans can have for the right borrower and also flagged some of the important considerations to be mindful of when structuring these loans. For lenders and the arrangers of ESG loans, the activity in the U.S. has been very much client driven. For borrowers, it has been stakeholder driven – both from internal and external stakeholders. These loans are seen as a unique way for borrowers to communicate their commitment to sustainability. ESG loans are typically loans where the margin is tied to the borrower’s achievement of predetermined sustainability targets. If the targets are met, the borrower receives a small discount on its loan pricing, and if not met, there is often a premium added. To date, nearly all ESG loans have been revolving facilities to investment grade borrowers, however, there is a difference in how these loans are priced in U.S. and Europe. In the U.S., ESG-linked pricing is on the drawn margin, but in Europe it is on the undrawn margin. This area was identified as perhaps one ripe for evolution in the U.S.
While it is exciting to see that the loan market has responded to the growing focus on sustainability, it is very important that parties are mindful about how these loans are structured to avoid “ESG-washing”. This is precisely why the LSTA, together with the LMA and APLMA, published the Sustainability Linked Loan Principles in March. This high-level framework identifies four core components for sustainability-linked loans: the relationship of the sustainability performance targets to the borrower’s overall CSR strategy, how these targets are set, how information on the targets is reported and finally the recommendation, in many cases, for external review. These core components address a number of the considerations highlighted by the panel. A successful ESG loan fits into and complements a borrower’s existing sustainability strategy. In structuring an ESG loan, attention to the sustainability performance targets is key – they need to be identifiable, ambitious, meaningful to the borrower’s business and, perhaps most importantly, readily measurable. ESG lending is certainly a space to watch and the LSTA is committed to fostering its continue growth.