Introduction
The loan markets have responded to the rise in ESG investment – investment focussed on or mindful of Environmental, Social and Governance criteria – by setting out certain principles for participants to engage with the Sustainability Linked Loan Principles (the “SLLP”) and the Green Loan Principles (the “GLP”). Whilst both these products might fall under ESG as an umbrella term, it’s worth bearing in mind that they are different products.
The GLPs and the SLLPs were released by the LMA, APLMA and LTSA in 2018 and 2019 respectively. As the products have developed, subsequent guidance highlighting the potential applications of the GLPs in the context of real estate finance was issued in 2020. More recently with the rapid rise in the number of sustainability linked loans, the LMA, APLMA and LTSA have taken time to reflect on the increase and have published an update to the SLLPs (see below).
Analysis
There is currently no standard form documentation for either green loans or sustainability linked loans. Whilst each of the GLPs and the SLLPS make suggestions on where focus should be paid, the absence of any market standard document allows the parties to decide if a loan is consistent with the GLPs or SLLPs. The lack of a market standard form may slow down the adoption of these types of loans.
Both the GLPs and SLLPs warn of the issue of “green / sustainability washing” where a loan’s green or sustainability features are exaggerated. The concern here being that such practices will undermine the value of those truly green or sustainability linked loans.
Though, in many respects, at least within Europe the introduction of Regulation (EU) 2020/852 of the European Parliament and EU Council which came into force on 12 July 2020 (the “Taxonomy Regulation”)¹ is intended to clamp down on so called “greenwashing”.
Whether investors obtain green loans to carry out a green project or a sustainability linked loan to improve their credentials, the incentives are now more than simply pricing in the financing product and are far more long term.
Many borrowers and sponsors have had an awareness of ESG, but it has not been a central focus and has often been relegated to the CSR office as something to include in marketing publications². But this is beginning to change. In a recent research report prepared by MSCI ESG Research LLC³ the authors noted that research indicated that companies with better-managed ESG risks tended to enjoy lower costs of capital suggesting that the market saw them as less risky.
ESG investment in an efficient or green building for example can allow owners/investors to command a premium, often referred to as the Green Premium⁴, resulting in higher rents or asset premiums on sale.
