introduction
Credit markets have responded to the rise of ESG investing – investing that focuses on or incorporates environmental, social and governance criteria – by establishing certain principles for participants to engage with the Sustainability Linked Loan Principles ( the “SLLP”) and the Green Loan Principles (the “GLP”). Although these two products could fall under the ESG umbrella, it is important to remember that they are different products.
The GLPs and the SLLPs were published by the LMA, APLMA and LTSA in 2018 and 2019 respectively. In the course of the development of the products, the following guidelines were issued in 2020, which highlight the potential applications of the GLPs in the context of real estate financing. More recently, with the rapid increase in the number of sustainability-linked loans, the LMA, APLMA and LTSA have taken some time to reflect on the increase and have issued an update to the SLLPs (see below).
analysis
There is currently no standardized form documentation for either Green Loans or Sustainability Linked Loans. While both the GLPs and SLLPS make suggestions as to where the balance should be paid, the lack of a standard market document allows parties to decide whether a loan is compatible with the GLPs or SLLPs. The lack of a standard market form can slow down the rollout of this type of loan.
Both the GLPs and SLLPs warn about the problem of “green/sustainability washing” where the environmental or sustainability attributes of a loan are exaggerated. The concern is that such practices undermine the value of these truly green or sustainability-linked loans.
However, the introduction of Regulation (EU) 2020/852 of the European Parliament and the EU Council (the “Taxonomy Regulation”)¹, which came into force on July 12, 2020 (the “Taxonomy Regulation”)¹, is intended to counteract this in many respects, at least within Europe, known as “greenwashing”.
Whether investors receive green loans to undertake a green project or a sustainability-linked loan to upgrade their skills, the incentives now go beyond mere pricing of the finance product and are far more long-term.
Many borrowers and sponsors were aware of ESG but were not the focus and were often referred to the CSR office as something to include in marketing publications². But that’s starting to change. In a recent research report3 prepared by MSCI ESG Research LLC, the authors noted that research suggests that companies with better managed ESG risks tend to have lower costs of capital, indicating the market viewed them as less risky.
ESG investing in an efficient or green building, for example, can allow owners/investors to charge a premium, often referred to as a green premium⁴, resulting in higher rents or mark-ups when selling assets.
Comments are closed.