Lenders seek loans tied to borrowers’ sustainability performance

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More companies may have to include sustainability features when raising funds as lenders in Europe are increasingly seeking loans with terms tied to borrowers’ ESG (environmental, social, governance) track record.
More than half of 40 Europe-based bankers in an informal Bloomberg News survey say more lenders are looking to participate in sustainability-linked deals, in spite of challenges in setting aggressive targets and standardization of ESG ratings. The survey was conducted between February 5 and February 11.
“Lenders are clearly encouraging borrowers to incorporate ESG metrics in their financings, not only because the regulator is putting pressure in that sense, but also because it makes sense from a risk and business perspective,” said Emilio Lopez Fernandez, head of corporate lending Iberia at Banco Bilbao Vizcaya Argentaria SA, an active lender in the market.
Borrowers support
Borrowers in Europe, Middle East and Africa are also welcoming the addition of sustainability features in their fund raising, having tripled such borrowings to 95 billion euros ($103 billion) in 2019 from 2018’s 33 billion euros. Sustainability-linked loans took up 27% of last year’s high-grade loans in the region.
“Borrowers have understood the importance of this type of financing in their financial strategy and the fact that this is not something trendy, sustainability-linked loans are there to stay,” said Fernandez.
These deals are usually structured with pricing adjustments, more expensive for issuers if targets are not met, and cheaper if borrowers exceed the metrics.

Discounts or not
Only 38% of those surveyed believe that no discounts should be given to borrowers for ‘doing good.’ Instead, companies should only be penalised when they fail to meet ESG targets.
Linking borrowings to sustainability performance or ESG rating is an additional indicator of a company’s credit quality, said Albert Graf, director for corporate finance with Telefonica Deutschland Holding, which signed a 750 million euro loan tied to its ESG rating by Sustainalytics in December.
“The pricing reduction or increase in these deals are minimal,” he said. “There is more substance and meaning to just the few basis point gains.”
Eighty-three percent of respondents think that sustainability-linked loans can help or improve a company’s ESG ambitions.
“Sustainability-linked loans have a clear reputational impact and therefore do influence the overall corporate’s strategy and at the same time reduces the risk for a borrower to become browner,” said Fernandez.
Nevertheless, there are still concerns of greenwashing or non-aggressive targets as 40% of respondents feel that ESG doesn’t necessarily reflect sound financials.
“The financial impact may not be apparent immediately, and may take months or years to reflect in accounts,” Graf said. However, “consumers, customers, investors could hold it against companies if they do not improve their sustainability performance.”
© 2020 Bloomberg L.P.

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