Supply of resilience-related loans outpaces green bonds and loans amid rising demand in the US

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Global lending related to sustainability has far surpassed issuing green lending and bonds as companies in the U.S., including those in transition sectors, are rapidly adopting this tool as an alternative to traditional environmental, social and governance duty.

A product that gives companies a discount if they achieve their individual sustainability goals, also continues to thrive in Europe, which has the highest consumption to date. In the first half of 2021, the European leveraged loan market saw a sharp increase in the number of sustainability-related issues and is now poised for growth among mid-cap companies and small and medium-sized enterprises.large enterprises, according to the Credit Market Association.

Unlike green debt, which must be used to finance green projects, sustainability-related loans have no restrictions on how the proceeds can be used, making them a viable option for companies across a wider range of sectors.

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The coronavirus pandemic has caused a temporary slowdown in sustainability-related lending growth in 2020 as companies’ attention shifted to “more pressing issues,” the report said. Martin Hutchings, Finance and Capital Markets Partner at Freshfields Bruckhaus Deringer.

But issuing According to a Bank of America study, 2021 saw “colossal growth,” reaching $ 350 billion in the first six months of the year, up from $ 197 billion issued in the full year of 2020. Meanwhile, the supply of green loans in recent years has largely “remained unchanged “and amounted to only $ 42 billion in the first half of 2021. Resilience-related loans also surpassed the green bond supply, which stood at $ 202 billion in the first six months of this year. 2021, according to the Climate Bond Initiative.

While Europe has been at the forefront of sustainability lending since the first such agreement was signed in 2017, the instrument has grown rapidly in North America this year. The region delivered $ 122 billion in the first half of the year, up from $ 19 billion in 2020, according to Bank of America.

HSBC Holdings PLC, for example, recently expanded its offer of sustainability-related loans to its U.S. business, saying it will tie loans to goals such as reducing greenhouse gas emissions, removing waste from landfills and reducing water use, and social security and diversity. metrics.

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Pressure banks

According to research by S&P Global Ratings, the need to achieve corporate goals related to exposure financing within loan portfolios is one of the key drivers of “accelerating the market” for sustainability-related debt between banks. In particular, financing fossil fuel enterprises is becoming an important issue for bank shareholders, and lenders are also coming under scrutiny from governments, regulators and environmental groups.

According to Kevin, the flexibility of sustainability-related loans makes them particularly attractive to so-called hard-to-reach borrowers, such as the transport, chemical and heavy industry sectors, who have benefited more from the product than anticipated. Ranney, director of advisory services at Sustainalytics, who advises issuers on such loans. According to Nordea Research, these sectors are among the main users of sustainability-related loans, which have called the tool “a suitable alternative for businesses in sectors that are not sustainable in nature”.

Major oil and gas companies have also sought to raise ESG debt through sustainability-related instruments: in 2019, Royal Dutch Shell PLC signed one of the largest sustainability loans to date, linking interest and fees paid on a 10 billions of dollars, with its progress towards the short-term goal for the intensity of the net carbon footprint. It involved a syndicate of 25 banks, including Bank of America Corp., Barclays PLC, JPMorgan Chase & Co. and Industrial & Commercial Bank of China Ltd.

Italian oil company Eni SpA recently published a sustainable financing scheme to fully integrate The Sustainable Development Goals of the United Nations in various financial solutions, while its French counterpart TotalEnergies SE announced in February that all of its new bond issues will be linked to measurable targets.

New Markets

In Europe, sustainability-related borrowing has begun to grow beyond the initial interest of investment grade companies. According to LCD, more than a quarter of European leveraged term loans now have a pricing mechanism that includes the ESG language offered by S&P Global Market Intelligence.

According to Gemma Lawrence-Purdue, legal director of the Credit Markets Association, the next growth opportunity will be in the mid-cap and small and medium-sized enterprise credit markets.

The European authority hopes that the updated sustainability-related lending guidelines it released in May along with other global credit associations will support additional market growth globally as they can make lenders more comfortable with the product and its integrity, Lawrence-Said Pardew. “The Principles also provide more guidance and clarity about the expectations of new borrowers entering the market, which can encourage participation by companies that may be just starting their ESG or transitional journey,” she added.

Better transparency

The updated sustainability-related lending guidelines contribute to greater transparency and product integrity as well as more accurate key performance indicators or KPIs, according to Andrew Stanfield, a legal advisor at Linklaters.

Most importantly, borrowers are now required to obtain independent and external scrutiny of their performance against each Sustainable Development Goal, said Caroline Courtney, Linklaters banking partner. This will help banks to ensure that goals remain relevant to the borrower’s business and sector and remain ambitious, she said.

According to Courtney, while in the early stages of transactions, the overall ESG rating was common as the only KPI, the market is moving towards more specific and targeted KPIs. The updated guidelines reaffirm this trend as they require borrowers who use the overall ESG score to explain why this approach is considered the best indicator of the challenges they face, she added.

The publication of the new guidelines has “raised the bar” for sustainable lending, says Sustainalytics. Early… This may make it difficult for some companies to meet the requirements initially, but he expects them to be able to meet this challenge in the long term.

Hutchings of Freshfields said many companies may still not have used a sustainability lending instrument because they have not yet developed an ESG program or because they have no confidence in how they track or communicate their goals. But companies will inevitably overcome this challenge amid growing pressure from investors and stakeholders they face to communicate their ESG efforts, he said.

“If they do this anyway, they can expect to receive financial benefits. [through the sustainability-linked loan]“I see that over the next 12 months, two years, most loans, at least most corporate revolving funds, will start to include ESG adjustments,” Hutchings said.

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