The ethical label is hard to verify in the secret world of ESG loans

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This content was published on 22 Jun 2021 – 09:43.

(Bloomberg) – The booming market for ethical loans is starting to raise questions about whether they are actually delivering on their promises.

Sustainable Development Goals are usually not disclosed and investors are often unable to hold companies accountable for achieving environmental or social goals. While some industry associations are pushing for stricter rules and independent reviews, the loan market is far from transparent in the rest of the ESG space.

“There are deals in the market where we thought the targets were below par,” said John Corrin, head of Australian and New Zealand corporate finance at Banking Group Ltd. from Hong Kong.

Corrin, who declined to discuss specific loans, said his firm pushed companies towards more ambitious goals or turned down deals that did not meet their standards.

An example is the British developer Grosvenor Group. This month, the company closed a £ 1.1 billion ($ 1.52 billion) project “ready for sustainable development,” without disclosing verifiable goals in terms of key performance indicators (KPIs).

The loan will be converted into a sustainability mechanism within 12 months after ESG targets have been agreed with lenders, a spokesperson said via email.

Ethics labels can be difficult to verify in the notoriously opaque credit market. In some cases, borrowers secure loans with ESG labeling even before environmental, social and governance goals are set for them.

A $ 100 million sustainability loan from a joint venture between Dow Chemical and Turkish textile company Aksa Akrilik Kimya Sanayii AS did not provide details of the targets in public filings this month. A spokesman for Aksa Akrilik was not available for comment when contacted by Bloomberg.

“It will be difficult to see the impact of these loans on ESG if borrowers are not required to publicly report on whether or not they have met targets,” said Nneka Chike-Obi, Hong Kong’s director of sustainable finance at Fitch Ratings.

This has not stopped investors from participating in the deals. The market for sustainability-related loans is booming, accounting for four-fifths of the $ 203 billion in funding to meet the environmental, social and governance goals achieved to date globally this year. Sales in 2021 are already up more than 40% over last year.

Transparency nudge

Loans are confidential agreements between companies and banks and are not traded on secondary markets, and investors cannot find out what their terms are unless the borrower voluntarily provides information. This is in contrast to publicly traded sustainability-linked bond transactions, where KPI targets are disclosed and borrowers agree to pay fines to lenders if they fail to meet them.

Doubts about the booming market and its claims against ESG have drawn the attention of regulators in the European Union in tandem with US efforts to curb ESG investment misconduct.

Credit Markets Associations in Europe, the US and Asia Pacific have tried to tighten guidelines for sustainability-related credit. For example, as of June 3, a borrower’s compliance with the KPIs must be reviewed by an independent arbiter.

With so many companies wanting to join the green bandwagon and tout their ethical principles, some are optimistic that the pursuit of transparency will bring results.

“The sustainability framework is a powerful tool for demonstrating companies’ commitment to ESG and encouraging disclosure of their performance,” said Ana Carolina Oliveira, head of sustainable finance at ING Americas in New York.

Europe

There were at least 12 deals on the primary bond market on Tuesday, including a new 10-year issue from Spain, two offers from KfW and a second-tier bond from Italy’s Banco BPM SA.

  • Major Spanish oil company Repsol SA is announcing a second day for investor applications to promote its new sustainable debt for environmental projects.
  • Scandinavia’s largest resilient debt organizer says investors are likely to continue to prioritize green bonds over other more complex fixed income ESG products in the coming years.

Asia

At least five investment grade issuers dominated the surge in dollar bond deals on Tuesday as issuers in emerging markets rush to record historically low financing costs.

  • According to the Climate Bonds Initiative, only about half or less of China’s green securities meet global standards for what is considered green.
  • South Korean coal-fired power plant operator Samcheok Blue Power Co. struggles to sell 100 billion won ($ 88 million) bonds as investors become more environmentally conscious.
  • MORE: China’s $ 113 Billion Green Bonds Felt In A Mess Of Regulations
  • MORE: Investors Avoid Bond Sale By Korean Coal Plant Builder

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Market participants expect $ 15 billion to $ 20 billion in investment-grade sales in the next five days, slightly lower than in recent weeks.

  • In a highly profitable market, gun accessory maker Magpul Industries Corp. softened the terms of the sale of its bonds after a cool reaction from investors.
  • Interior decorating firm At Home Group Inc. held a road show on Monday offering $ 800 million.

© 2021 Bloomberg LP

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