As Bradley says, we’re still on the journey of raising the bar and standardisation around ESG metrics in fund finance, and the more society is pushing for these things, the more the decisions of the borrower and the investor will have ESG embedded at the core of what they are doing.
Shelley Morrison, abrdn – There’s three main trends. The first is the two-way margin adjustment. When ESG facilities were first shown to us, we saw a lot of one-way margin adjustment, and it’s good to see that borrowers will now get a benefit, or a penalty. That’s important.
The second is the emergence of hard metrics, not just at the portfolio-company level, but at the sponsor or the manager level too. So, people are getting their own house in order as well as their portfolio companies.
“When ESG facilities were first shown to us, we saw a lot of one-way margin adjustment, and it’s good to see that borrowers will now get a benefit, or a penalty. That’s important.”
Finally, there’s a trend I am uncomfortable with. We see a lot of good intention from funds and lenders, but we also see credit facilities where the ESG framework is documented, but the specific metrics of the reporting is not.
That’s dangerous, because if that intention isn’t quickly translated into action, it becomes at best just a PR exercise with little substance. Potentially, that is damaging to the credibility of ESG-linked fund finance.
Mehmood – External verification has also been an important development. That has been driven very much by the Loan Market Association standards, which have helped raise the bar in everyone’s best interest.
Against the backdrop of ‘greenwashing’, which is a key concern for lenders and borrowers alike, we want this to be future-proof, so that when people look back at it in five years’ time, they’re not saying, ‘That wasn’t fit for purpose.’
Sarah Lobbardi, Avardi – We’ve had a different experience. Every time we speak to clients, they have this sustainability and ESG angle that they market to the investors and it’s something that is important for them. But we found that between having that conversation and putting ESG in place, there’s a different story.
Some of our clients want to do ESG and that means going back to the starting point and doing the real work upfront – we’re not going to start by just ticking two or three boxes. But they don’t have the metrics, and then they realise it’s a lot more work than they expected.
So, then they say: ‘Well, we don’t have time for this; it’s not the right time, so let’s leave this for the next round.’
We have had a few transactions where we started doing an ESG facility, but things took so long that it was dropped in the middle of the process. The time constraints of the fund managers didn’t allow the work needed. We’ve done green loan financing, which is quite different. Its whole purpose is environmental, and it works because the client is a green manager, and they have everything embedded.
But there are still a high number of fund managers – and here I’m speaking about quite large funds – that have ESG embedded in their investment strategy, but don’t yet have it [properly] embedded within the firm itself, which is what they need if they want to translate it into financing at the fund level.
So, we still have a way to go before the expectations on the financing side match the fund manager’s strategy and process.
Bronwen Jones, Reed Smith – In my role, I come in at the end of the process and draft what’s been commercially agreed. Certainly, over the last two or three years, the drafting I’m doing in relation to ESG has moved from a wishy-washy, feelgood idea to much harder measurable metrics.
For example, one I was looking at last year had requirements for the fund to appoint female directors to each portfolio company. There were also other measurements like ensuring portfolio companies use fewer high-energy light bulbs and less paper.
The metrics have become more specific than [in the past]. And I agree completely with the two-way margin, so it can be a bit punitive as well as a bit positive.