Sustainability-Linked Loans Outpacing Green Loans and Bonds

Loans linked to sustainability have emerged as an alternative to traditional ESG debt and have eclipsed green loans and bonds as a primary mode of financing globally, according to a new analysis from S&P Global Market Intelligence. 

The European Union has embraced the product, which gives companies a discounted rate for meeting tailored sustainability targets. Loans linked to sustainability increased dramatically in the European leveraged loan market in the first half of this year, according to S&P Global, and will likely break in among mid-cap companies and small and medium-sized firms. 

The product does not carry restrictions on use of proceeds, unlike green debt. 

Sustainability-linked loan issuance hit $350 billion in the first half of 2021, compared to $197 billion in all of last year. That’s a dramatic figure when compared to green loans, which totaled $42 billion so far this year. 

Of the global total, issuance among North American firms hit $122 billion, a serious uptick from the $19 billion posted for the full year of 2020, according to data from Bank of America.

Interest in ESG initiatives has shot up dramatically as of late, but some experts warn that greenwashing is a major concern. A recent report on the sector from Generation Investment Management notes that while ESG initiatives “offer big opportunities for sustainable investing… they will do more harm than good if we fail to set a high bar.”

“There is growing unease at the low quality of some net-zero commitments, the absence of guardrails for natural solutions and the sustainability performance of ‘offset’ markets,” the report notes. “Misleading sustainability claims are also spreading online at an alarming rate.”

Even the sustainability-linked loans are viewed by some as “just good PR”, motivated more by public perception than actual commitment to ESG principles.

“Honestly, the rate reductions you’re seeing are miniscule, but it generates a lot of good public relations for these companies and that they’re practicing what they preach,” Glenn Brill, a managing director in the real estate solutions practice at business advisory firm FTI Consulting, told GlobeSt.com in an earlier interview. Although some firms have claimed a reduction in borrowing costs of 10 basis points, “usually it’s like five basis points or less,” Brill said.

Nonetheless, commercial real estate companies and REITs began pouring money into ESG commitments well before the COVID-19 pandemic, with the pace accelerating significantly during 2020 and showing no sign of stopping.  Blackrock CEO Larry Fink announced plans at last year’s Morningstar Investment Conference to integrate ESG metrics into 100% of the firm’s portfolio by year’s end, and he reaffirmed that commitment in his letter to CEOs this year. 

“Over the course of 2020, we have seen how purposeful companies, with better environmental, social and governance profiles, have outperformed their peers,” he wrote. “It is clear that being connected to stakeholders—establishing trust with them and acting with purpose—enables a company to understand and respond to the changes happening in the world. The more your company can show its purpose in delivering value to its customers, its employees and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”