
Insight
As the recent COP26 Summit in Glasgow demonstrated, every country and every industry has a role to play in helping to keep the impacts of climate change to a minimum. This includes the world of banking and finance.
While some financial institutions were already starting to push forward with ESG and sustainability programmes, COP26 will no doubt serve to renew efforts, which will in turn filter down to impact on borrowers and lenders alike in the mid-market and SME space.
An entire day of the summit was dedicated to finance, with key announcements including:
The ISSB will develop a new global baseline of sustainability disclosure standards, which will be usable on a stand-alone basis or form the basis of regional regulatory requirements.
This wasn’t technically announced at COP26, but was timed to coincide. The Strategy includes:
The Chancellor announced the publication of a transition pathway for financial services. This will build on the Greening Finance Roadmap and set out new policies and milestones for the sector leading up to 2050. The policy is expected to be published in 2022.
The NGFS, a network of 100 central banks and prudential supervisors across the globe committed to:
The agenda around ESG and sustainability is moving fast and is rapidly cascading down to impact borrowers and lenders of all sizes. This is only expected to increase with the new commitments made during the COP26 Summit.
Indeed, ESG and sustainability factors are an increasingly common feature of the loan market globally and on their way to becoming a standard feature of many loan products. Typically, sustainability loans come under two categories – green loans and sustainability linked loans.
So called green loans were developed out of the long established green bond market. Simply put, they are loans made expressly for specific environmental projects.
Sustainability linked loans (SLLs) are different as they can be used for a wider range of purposes, but will contain clauses setting out KPIs where the performance of the borrower is measured against specific sustainability metrics. Performance against these metrics will then have an impact the loan pricing.
These features are proving to be popular and are used to incentivise the sustainability performance of the borrower. The idea of linking a pricing mechanism to a set of ESG KPIs is quite straightforward and can be added to loan documentation with relative ease. In addition, they can be made available to the majority of borrowers.
Here is what borrowers and lenders should consider when looking to incorporate sustainability elements into their loan agreements: