There are two ways of measuring the success of sustainability-linked loans. One is the popularity and take-up of such loans. In this respect, the first half of 2021 was a staggering success as their volume reached $350 billion, according to research from Bank of America. In a market that’s only been around since 2017, this represents a game-changing period. In the whole of 2020, the busiest year for such loans up to that point, the total was less than $200 billion.
Part of the reason for the growth of sustainability-linked loans – which offer discounted rates to borrowers if certain sustainability targets are met – is their wide-ranging applicability. Green loans, as the name would imply, are available only for green projects. By contrast, a sustainability-linked loan can be used by any types of company or project.
Europe, with its strong focus on environmental, social and governance issues, was unsurprisingly the place where the sustainability-linked loan first gained acceptance. But in North America, which has attracted some criticism from European LPs for its relatively lukewarm response to ESG, take-up has also been strong. The region saw sustainability-linked loans rise sharply from just $19 billion in full-year 2020 to $122 billion in H1 2021.
Long gone are the days when debt providers sat passively in the backseat when it came to ESG issues, allowing private equity firms to take the steering wheel. It has long since been recognised that debt is in some ways better suited to demonstrating ESG credentials than equity. It’s notable how many private debt firms have been scrambling to sign up to the United Nations Principles for Responsible Investment in the past few years.
However, to return to the point made in the opening paragraph, there are two ways of measuring the success of sustainability-linked loans – the other being credibility. And this, it seems, is a work in progress. Research earlier this year from the European Leveraged Finance Association found some evidence that issuers of green and sustainability-linked bonds and loans were able to effectively game the market by reaping the benefits of interest savings while structuring the facilities in such a way that key performance indicators may not necessarily have to be met.
Partly as a result of its findings, ELFA has been working on ways of trying to ensure best practice in the field. Those with an interest in not just the take-up of sustainability-linked loans but also their long-term credibility will wish them well with the task.
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