10 Dec 2019

Sustainable lending has been gaining momentum in the banks in recent years. Sustainability is a recurring theme in the 2019 election manifestos of the main political parties. In this article we consider the election pledges being made on sustainability and some of the impacts these could have on how lenders do business.

The debt markets reflect the increasing awareness of the need to respond to environmental and sustainability issues. Green investments in the five major global markets were reported to stand at $30.7 trillion at the start of 2018, an increase of 34% in two years[1]. At the end of November, it was reported[2] that the EU is considering easing banking rules in order to spur green investment in Europe to encourage banks to finance green projects by reducing the amount of capital they would have to set aside against such lending. The current Governor of the Bank of England, Mark Carney, has recently been appointed as UN Special Envoy for Climate Action and Finance to help lead the transition to a net-zero economy.

Trade bodies, including the LMA[3], have been working together to develop consistent methodologies for use across the loan markets in relation to green and sustainable lending. These include:

  • The Green Loan Principles: published in 2018, these set out a clear framework whereby loans may be categorised as "green". The fundamental determinant of a green loan is the utilisation of the loan proceeds for "Green Projects". The principles contain a non-exhaustive list of Green Projects; these include renewable energy, energy efficiency and pollution prevention and control
  • The Sustainability Linked Loan Principles: published in 2019, these guidelines seek to capture the fundamental characteristics of sustainable loans to enable lenders to incentivise borrowers to improve sustainability. Rather than determining specific uses of proceeds, sustainability linked loans align loan terms to borrowers' performance against sustainability targets.

The environment is a running theme through the Conservative, Labour and Liberal Democrat manifestos. In many instances the parties seek to pass on the responsibility to increase sustainability to big businesses, including the banks. For example:

  • Labour propose the delisting of companies failing to contribute to "tackling the climate and environmental emergency"
  • The Liberal Democrats would introduce regulation of financial services to encourage green investments, as well as new powers for regulators to act if banks and other investors are not managing climate risks.

It is clear from the manifesto pledges that there is likely to be an increased drive by lenders to support sustainability over the coming years. One way for lenders to demonstrate this commitment is by allocating a larger proportion of their funding to Green and Sustainability Linked loans. Another possible outcome is that lenders may exert increased pressure on borrowers to improve their own sustainability. For example, we may see:

  • The insertion of more onerous environmental representations and undertakings in finance documents
  • Increased due diligence and independent reporting on borrowers' environmental compliance as a condition precedent to lending
  • Loan terms (such as a margin reduction) designed to incentivise borrowers to meet sustainability targets.

Whatever the outcome of the election it seems inevitable that lenders' focus on green and sustainable business will continue into 2020 and beyond.

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[1] 2018 Global Sustainable Investment Review

[2] Financial Times, 27 November 2019, "Brussels eyes easing bank rules to spur green lending"

[3] Loan Market Association