With ESG now a focus for all companies, more questions are being asked by employers, consumers and supply chain partners around the ESG credentials of products, services and investments. The same pressure is coming from employees demanding more from their employers, prompting the realisation that businesses of all types can no longer turn a blind eye if they want to avoid financial and reputational damage.
“Individuals are helping to drive the ESG agenda and that is filtering up through organisations who are tackling it from the top down,” says Chris Williams, Head of Project Finance, London at Landesbank Baden-Württemberg (LBBW). “That meeting in the middle is one of the reasons why we are seeing a change in emphasis on ESG.”
Still early days
In the financial services sector, while the ESG agenda is top of the priority list for almost all institutions the actual provision of green and sustainability linked finance can be inconsistent, with both lenders and borrowers coming to terms with the concept of sustainability-linked loans. However, the market is advancing all the time - last year Shoosmiths advised on one of the largest regional sustainability-linked loans and, as Debra Cooper, a partner in Shoosmiths’ banking team who led the deal, says: “12 months on, that deal would look very different now.”
She adds: “Government is encouraging banks to provide green loans but offering little guidance on how to do it, and when you look at the consequences of greenwashing, the market is understandably wary. As a result, we are seeing green loans being driven by the bigger banks in the short term as smaller banks often won’t have the resources to dedicate to it”
LBBW is evidence of this – a mid-sized international bank that takes ESG very seriously, to the extent that it now has three distinct advisory groups – for corporates, for savings banks and for not-for-profits – whose sole focus is ESG. Patrick Schwiertz, Head of Sustainability & ESG at LBBW, says: “The last two years have seen an acceleration in progress with ESG. One example is our updated coal policy that we passed last year and, for instance, now excludes general financing for energy suppliers that build new coal plants. That is a big change from four years ago.”
“If all funding became ESG-linked, we’d have a
major problem in this country.
Doing the right thing
So, progress is slowly – albeit sporadically – being made by lenders, but is there sufficient demand from borrowers?
“We are seeing some but not massive demand at the moment,” says John Carter, Commercial Director at Aldermore Bank. “For us, it is really about embedding ESG into the daily operations of everyone in our supply chain so that it becomes a self-fulfilling prophecy. It is about doing the right thing and awareness is growing. Collaboration is key here as we can all learn from each other and across the industry and understand what we can do that is authentic to our business.”
One possible reason for the variable take-up by borrowers is that the green finance market is currently based on incentives. Debra Cooper says: “At the moment, typically there is a pricing incentive with green loans – if you can tick certain ESG boxes then you can get a better interest rate. However, as the market gets more mature and established, we will get to the point where, if your assets are not ESG-compliant, then you won’t be able to borrow money against them. So, if you have a large property portfolio where half of your assets are not at the standard required by your ESG-linked loan, you have a decision to make. Either undertake a costly retrofitting programme or go to a smaller bank or a different type of funder. There is a huge risk that asset owners will struggle to find funding for under-performing assets at a price they are used to.”
“People who are talking the talk but not walking the walk will get found out.
This view is endorsed by Paul Brocklehurst, Chairman of the Land Promoters and Developers Federation: “Businesses are thinking about ESG in a very narrow focus. It becomes more topical for larger organisations who have greater resource to dedicate to it, shareholder pressure, customer expectations and larger supply chains. If all funding became ESG-linked, we’d have a major problem in this country as many smaller real estate businesses won’t have resource to dedicate to capture and report on ESG-linked KPIs.”
Sheelagh Cooley, a partner in Shoosmiths’ real estate finance team, goes further: “SMEs will find it more challenging to access green finance than the larger, more established operators. It is critical that appropriate support is given to the SME sector to ensure they can access green finance as many such companies will be the owners/occupiers of older buildings where retrofitting will be required and relocation or replacing that building with a new sustainable building will not be an option. It is incumbent upon lenders and larger corporates to ensure that doesn’t happen by sharing their knowledge and expertise – it’s only in that way that the built environment as a whole will be able to achieve its carbon reduction targets.”
Measurement
A key challenge to the advancement of ESG-linked loans is around the measurement of compliance, which at the moment, Debra Cooper says, is “like the wild west, with a real lack of consistency across the market and sectors”.
Chris Williams agrees: “In terms of measurement of KPIs on ESG-linked loans, it is fair to say it is in the developmental stage. In the renewables space, for example, you can look at the number of gigawatts of energy being produced, the number of homes being powered by green energy and CO2 savings, but there isn’t a standard set of KPIs that everyone adheres to and different companies have their own interpretation of what is important – it needs more consistency.”
“There is also the issue of who is qualified to do that measurement,” says Debra Cooper. “Some banks have assembled green loan compliance teams, but there is a cost attached to that which may get passed on to the borrower, wiping out the original cost saving from the green loan. It also places more responsibility on the banks to resource this and is a much bigger job than the government first envisaged.”
However, in order to measure accurately you need accurate data. “Data integrity is a key challenge for financial climate analysis,” says Ryan Friel, Operational Risk Manager at LBBW. “Climate related financial data is very much in its infancy and this feeds into measurement methodologies that produce climate change metrics, which are already based on assumptions.”
“Every business along the supply chain has to now get on board with it or risk being left behind.
Transparency
For all the challenges and teething troubles of an embryonic market, it is clear that there is little place to hide, with government, industry and consumers increasingly committed to calling out and combatting greenwashing. “People who are talking the talk but not walking the walk will get found out in the coming years because there is a lot more transparency coming into the industry,” says Matt Soffair, Research Manager, Retail and Leisure Real Assets at Legal & General Investment Management. “It’s non-negotiable now and at the forefront of our clients’ minds, and therefore is at the forefront of our minds.”
Chris Williams says: “With EU taxonomy making everything more transparent, people can decide where they want to invest their money at shareholder level. So there will naturally be a flight to businesses with ESG credentials and carbon neutral strategies, as we see more requirements come through for reporting of it. Recalling the 10-point plan the government set out in 2020 for a green industrial revolution, investing such a heavy amount of capital into carbon neutral initiatives to hit net zero targets shows that businesses (particularly large companies) along the supply chain will need to do their best to be on board or risk being left behind.”
Contributors: Chris Williams, Head of Project Finance, London - Landesbank Baden-Württemberg, Debra Cooper, Partner, Banking – Shoosmiths, Patrick Schwiertz, Head of Sustainability & ESG - Landesbank Baden-Württemberg, John Carter, Commercial Director - Aldermore Bank, Paul Brocklehurst, Chairman - Land Promoters and Developers Federation, Sheelagh Cooley, Partner, Real Estate Finance – Shoosmiths, Ryan Friel, Operational Risk Manager - Landesbank Baden-Württemberg, Matt Soffair, Research Manager, Retail and Leisure Real Assets - Legal & General Investment Management
Disclaimer
This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2024.