Companies taking out loans with an ESG label but no immediate sustainability targets are a worrying new trend, according to BNP Paribas SA.
Agnes Gourc, head of sustainable capital markets at the French bank, told Bloomberg News that some borrowers want the benefits of linking loans to environmental, social and governance goals without revealing specific targets or performance metrics until a later date.
Such “dormant” sustainability-linked loans (SLL) from companies including Grosvenor Group Holdings Ltd. and Raven Housing Trust Ltd., have already raised concerns about how exactly they relate to social and environmental benefits, adding more fuel to a global debate. about corporate greenwashing.
The stakes are high and rising as sustainability-related debt grows in popularity. Issuers often see SLLs as an easier entry point into environmental, social and governance products than green bonds, as proceeds are not limited to ESG purposes.
Bloomberg Intelligence estimated that the market for ESG debt could reach $15 trillion by 2025. BNP Paribas is a leading arranger of traditional SLL deals, which has seen fourfold growth to a record $490 billion in 2021.
Below are Gourc’s comments on sustainability-related loans and other topics:
What exactly is a ‘Sleeping’ SLL?
This is a new type of agreement in the market, which includes some elements of an SLL structure, such as possible margin adjustment, but crucially lacks defining at the outset what the key performance indicators (KPIs) or targets are of durability performance (SPT). These are essential elements of an SLL structure, but they will only be agreed later in the loan agreement under this new construct. Having such intentions in the initial agreement is not enough to classify the instrument as an SLL, as confirmed by the Loan Market Association.
What are the risks for such loans?
The level of engagement with lenders may not be sufficient to define material KPIs and ambitious SPTs over the term of the agreement, particularly as changes typically require approval by a majority of lenders.
Can transparency be improved?
It is still an area of development for the annual targets to be revealed, but we believe that the intermediate sustainability targets included in the agreement can be shared and help increase material impact. And borrowers should at least find out what the KPIs are.
What are the main complaints of borrowers about SLLs?
Sometimes it takes longer than anticipated to set up an SLL. Being accused of greenwashing is also becoming a real concern, which is why relying on rigorous expertise from solid sustainability coordinators is important. Our role is to ensure strong compliance with market standards, particularly by ensuring that KPIs are material and targets are ambitious and well accepted by the market.
We have contributed to the development of the International Capital Markets Association’s KPI Register, a comprehensive set of benchmark metrics that are generally seen as material for each sector, and that we expect will be used in sustainable financial instruments.
Why aren’t the social and governance parts of ESG more popular?
Traditionally, environmental objectives are science-based and therefore may be considered easier to assess in some cases. Harmonizing and quantifying social or governance goals can sometimes be challenging. However, they may be more important in some sectors, such as healthcare—and there are good suggestions in ICMA’s KPI Register.
What is the outlook for SLLs?
There are certainly further improvements to be made. SLLs will continue to develop and grow. The vast majority of borrowers will at some point question whether they can do an SLL, and every sector is likely to see further development of sustainability-related finance, but adherence to strong market standards remains essential.
Jacqueline Poh reports for Bloomberg News.