As a result of increased investor appetite for ESG friendly investment (sustainable finance), banks and other funders are increasingly considering ESG strategies and criteria when providing funding.
When funders provide sustainable finance they want to know how and where their monies will be spent, whether they will provide environmental or social benefits, or otherwise have a beneficial impact by reference to ESG criteria. Investors are increasingly interested in being able to see that progress to measurable goals is being achieved and often regulation is obliging them to do so.
Transparency is key to sustainable finance so that investors can make comparisons across markets and sector and invest their monies to have the most impact.
Sustainable finance has two structures:
1. ‘Use of proceeds’ where monies borrowed can only be used for green or social projects which fall within defined criteria.
For the built environment, use of proceeds facilities have been most prevalent to-date, with project criteria following environmental requirements. With terms for sustainable finance expected to tighten over time, issuers/borrowers should consider the effects if they would need to do more than is currently business as usual, to be able to raise sustainable finance.
2. Sustainability linked loans/bonds where the issuer/borrower sets its own ESG targets and agrees to make incremental improvements with reference to those targets, year-on-year.
With commercial banks commenting that sustainable finance will be the default option within 5 years, and regulators increasing their focus on statements about ESG, you should consider whether you would be comfortable offering ESG covenants to financiers and whether you have the data and other evidence to support those covenants where necessary. Don’t leave this until you need to raise finance and make sure specific terms related to sustainable finance are discussed at term sheet stage.
If you’re planning to borrow in the medium term, we suggest that you consider the following:
- Do you have an ESG strategy?
- Is that strategy understood and embedded through your organisation?
- Do you have a governance structure, data (including from your supply chain) and other evidence support ESG terms offered to funders?
Funders will want to check that a borrower’s ESG strategy is positioned within its overarching objectives, strategy, policy and/or processes. The ESG strategy should be a part of and be aligned with the borrower’s other objectives as this has the greatest chance of success.
For an ESG strategy to be successful and to be able to meet terms offered to funders, the strategy will need to be embedded and understood throughout the organisation. Funders will want to see that there is a governance structure in place to ensure that this is the case.
Finally, don’t forget that JVs will have their own considerations if the SPV will be raising sustainable finance or monies are being invested/on-lent that are subject to their own ESG criteria. It is understood that ESG is a journey and for most, that journey is just getting started. WS has a cross-sector working group to support clients on the journey and we would be pleased to discuss further.