Sustainability-linked loans have emerged as an alternative to traditional ESG debt and have eclipsed green loans and bonds as the primary mode of financing globally, according to analysis by S&P Global Market Intelligence.
The European Union has adopted the product, which offers companies a reduced price to meet tailor-made sustainability goals. Sustainability-linked loans have grown significantly in the European leveraged loan market in the first half of this year, according to S&P Global, and are likely to break into mid-cap and small to mid-sized companies.
The product does not have restrictions on the use of the products, unlike green debt.
Sustainability loan issuance reached $ 350 billion in the first half of 2021, compared to $ 197 billion for the whole of last year. That’s a dramatic figure compared to green loans, which have totaled $ 42 billion so far this year.
Of the global total, emissions from North American companies reached $ 122 billion, a serious up from the $ 19 billion posted for the full year of 2020, according to data from Bank of America.
Interest in ESG initiatives has increased significantly in recent times, but some experts warn greenwashing is a major concern. A recent report on the Generation Investment Management sector notes that while ESG initiatives “offer great opportunities for sustainable investing… they will do more harm than good if we don’t set the bar high”.
“There is growing unease over the low quality of some net-zero commitments, the lack of safeguards for natural solutions and the sustainability performance of ‘offsets’ markets,” the report notes. “Misleading sustainability claims are also spreading online at an alarming rate. “
Even loans linked to sustainability are considered by some like “just a good PR“, motivated more by public perception than by a real commitment to ESG principles.
“Honestly, the rate cuts you see are tiny, but it generates a lot of good PR for these companies and the fact that they are doing what they preach,” Glenn Brill, Managing Director of Solutions Practice real estate business consultancy firm FTI Consulting, told GlobeSt.com in a previous interview. Although some companies have claimed a 10 basis point reduction in borrowing costs, “it’s generally like five basis points or less,” Brill said.
Nonetheless, commercial real estate companies and REITs started investing money in ESG commitments long before the COVID-19 pandemic, with the pace is accelerating significantly in 2020 and shows no signs of stopping. Blackrock CEO Larry Fink announced his intention at last year’s Morningstar investment conference to integrate ESG measures into 100% of the company’s portfolio by year-end, and he reaffirmed this commitment in his letter to CEOs this year.
“During 2020, we saw how determined companies, with better environmental, social and governance profiles, outperformed their peers,” he wrote. “It is clear that being connected to stakeholders – building trust with them and acting with determination – enables a company to understand and respond to the changes that are taking place in the world. The more your business can demonstrate its purpose in delivering value to its customers, employees and communities, the better able you will be to compete and generate long-term sustainable profits for shareholders.