Linking your ESG goals to green finance

Contrary to popular assumptions, green lending is not limited to traditionally ‘green’ companies or companies with a visible or extensive carbon footprint. Improving the management or processes of any business can make it more sustainable and qualify for a sustainability-linked loan.

This is good news for corporates, as many are already responding to pressure from customers, clients, employees, suppliers and regulators to improve their environmental, social and governance (ESG) performance. 

As this pressure grows – and the green finance market matures – it’s important for corporates to understand what ESG is and what metrics they can set targets against. 

Growth of green lending

The global market for sustainable debt is growing rapidly, with annual issuance said to have reached over $732 billion in 2020 across various sustainable bond and loan product varieties. 

Although we have seen large corporates dominate the market, subject to the usual credit assessments, green and sustainable products are open to all corporates regardless of size. 

Sustainability-linked loans in particular are seeing an increase in awareness, accessibility and activity in the mid-market. 

ESG metrics 

When we talk about setting targets against key performance indicators (KPIs) linked to ESG factors, these can be internal and bespoke, external and evaluated against the borrower’s peers by an external reviewer or a combination of the two.

As well as specialist ‘global’ assessments of ESG provided by rating agencies, companies may look to set targets against specific KPIs linked to various ESG factors, including:

Environmental

Energy efficiency
Greenhouse gas emissions
Renewable energy
Water consumption
Pollution and contamination
Biodiversity loss
Sustainable sourcing

Social

Human rights
Community impact
Health and safety
Labour policy and practices

Governance

Board diversity
Reputation
Corruption and bribery
Management

These examples are of course only indicative and as the market has developed we have seen an increase in more complex and bespoke ESG linked KPIs relevant to different sectors.

Recent examples 

The ‘E’ in ESG is well documented. There are a number of energy companies that have taken sustainability-linked loans using KPIs linked to renewable energy or emissions. 

However, ambitious ‘S’ and ‘G’ targets are also becoming increasingly popular for corporates. We have seen businesses take loans linked to KPIs such as board diversity (looking at the proportion of women and people from ethnic minorities on the board) and employee development (such as the number of training hours available for employees).

Another example is the UK social housing sector, which has an inherent social impact objective by its very nature. However, housing associations that are working to support residents not only through housing but also through education, employment and other social welfare initiatives are obtaining sustainability-linked loans. 

In one example, a housing association delivered an agreed number of accredited childcare qualifications through its childcare training programmes. In another, the provider supported an agreed number of people into work each year through its training and support programmes.

The key point from a sustainability-linked loans perspective is that the ESG-linked targets are ambitious, robust (ideally using equivalent metrics and external ratings if possible) and meaningful to the business. 

Many companies are already monitoring ESG metrics as they form part of their overall business strategy. By fine tuning how they are measured and monitored, businesses can harness this information for the purposes of financing.

What should corporates do next?

As ESG metrics start to become increasingly more significant to funders’ overall lending policies, and green and sustainable financial products become more widely accessible for corporates, it is important that corporates engage with all of their stakeholders, lenders and advisors collaboratively.

Ultimately, the return on investment from sustainable finance is not exclusively seen in terms of profit, revenue or asset value. An appraisal of ESG through the use of sustainable finance can add economic, social and natural value to any business as well as a benefit to wider society.

Written by Paul Crighton and Michael El Gawly 

This article was first published by North West Business Insider 

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This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.