ESG issues are very much to the fore this year, and rapidly overtaking LIBOR as the hot topic in finance. So-called sustainability-linked loans and bonds, and even occasionally derivatives, are becoming quite common and it is even possible to discern one or two common positions evolving – although it would be too early to talk of there being a market standard approach.
The development of sustainability-linked debt has publicity benefits for both debtors and creditors. Both borrowers and lenders alike have been happy to agree mechanisms which produce a lower interest cost, typically in the region of 3-5 basis points. This seems roughly to reflect the reported difference in yield between otherwise comparable green and non-green bonds - if pre-defined sustainability targets are met. The upwelling of interest is a largely global phenomenon, but in the EU and UK it is given added impetus by the legislative changes which are underway.
The EU has led the world in pro-green and sustainability laws requiring both large corporates and their lenders to make a variety of disclosures: to shareholders directly, on websites, and even in some pre-contract documentation about their alignment with, particularly, environmentally sustainable factors. Throughout 2021 the EU is consulting on (prior to finalising) the detailed regulations concerning disclosure which are due to start coming into effect over the next couple of years. The UK has lagged behind the EU in this respect, but it has made clear on several occasions its intention to be a global leader in this regard.
Proposals are expected from HM Treasury before the summer about the future shape of UK law, particularly as regards how it intends to bolster the governmental aspirations and commitments contained in the Paris Agreement on Climate Change. Whilst the EU has been (and still is) developing its own guidelines and taxonomies, the UK seems intent on aligning with non-EU supra-national efforts, particularly those of the Taskforce on Climate-related Financial Disclosures, a body established by the Financial Stability Board.
There seems to be no likelihood in the short term of any change to EU or UK regulatory capital requirements for ESG-related loans, but unless - and until - public money is used to subsidise lower rates of return on ESG-related loans or other legal compulsion is introduced, suspicions of “greenwashing” are unlikely to disappear entirely.