Sustainable Loans: Continued demand in a maturing market

Sustainable Loans have grown exponentially. Demand from borrowers has attracted increased regulatory scrutiny.

As the market for sustainability-linked loans (SLL) matures regulators are increasingly looking to tackle greenwashing issues. However, there is continued interest from borrowers to embed ESG features as part of their financing needs. 

In a recent feature by Environmental Finance, BNP Paribas’ sustainable finance specialists and the Loan Market Association (LMA) discuss the main trends and regulatory changes shaping the sustainability-linked loan market globally.  

They share insights on the changing landscape of key performance indicators (KPIs), noting increased focus on Scope 3 emissions, marked differences in the US and APAC, as well as an increasing role of SLLs in financing decarbonisation in hard to abate sectors.

Growing maturity in the market 

In its early stages the SLL market was dominated by companies with sophisticated sustainability plans and related performance metrics. However, during the following period of exponential growth, many companies issued financing with ESG features but were not mature enough in their sustainability planning to be able to implement the promises to the highest standard. 

As regulators look to tackle greenwashing issues in the market, the Loan Markets Association has reflected best market practice in various documents published over the years.  

Constance Chalchat

In 2023, the updated LMA Principles are very thorough and reflect recent market development across the global sustainable finance market, and we encourage all banks structuring SLLs to closely follow these. With widespread adoption of these principles, we will see a significant reduction in greenwashing issues.

Constance Chalchat
Head of CIB Company Engagement and Global Markets Chief Sustainability Officer, BNP Paribas 

While SLL KPIs are facing increasing scrutiny to ensure credible alignment to transition pathways, there is continued interest from borrowers to embed ESG features as part of their financing needs. Approximately 50% of revolving credit facilities (RCFs) in EMEA are renewed as SLLs.  

Gemma Lawrence Pardew

The dynamic nature of sustainability related regulation, covering a myriad of issues, from disclosure to greenwashing to supply chain considerations, requires increasing expertise amongst market participants. On SLL front, at the LMA we are continually encouraging members to ensure KPIs are selected to withstand the increasing scrutiny of press, the broader market and ensure alignment towards credible transition pathways.

Gemma Lawrence-Pardew
Head of Sustainability, Loan Markets Association 

One challenge has been addressing Scope 3 emissions in the SLL structure, as companies face the prospect of setting targets based on highly complex product life cycles, without access to all the data.

Agnes Gourc

The trend for the inclusion of Scope 3 targets in transactions is encouraging. The Scope 3 discussion is a far-reaching one as it will involve a company’s supply chain and use of product sold.  It’s about finding what is achievable today for a given company, even if that means it is a partial target.

Agnes Gourc
Head of Sustainable Capital Markets, BNP Paribas

Increasing drive towards decarbonisation globally 

There is increasing momentum in decarbonisation within the hard-to-abate sectors in APAC, such as steel and cement producers.

On an instrument level, SLLs are an effective instrument in addressing the key financing challenges that they face as they embark on their ESG journeys. However, both use of proceeds and sustainability-linked structures are viable options for hard-to-abate sectors. There are clear capital expenditure (capex) and operational (opex) needs for these.

Chaoni Huang
Head of Sustainable Capital Markets, BNP Paribas APAC

In the US, uncertainty around the forthcoming Securities and Exchange Commission (SEC) proposals means companies are reluctant to specify KPIs, as the upcoming legislation could result in double reporting. However, there is growing momentum on transition, mainly resulting from policy drivers.

Anne Van Riel

In the US in particular, we are seeing growing demand for green loans on the back of the US Inflation Reduction Act. There are a lot of investments directed towards battery manufacturing, green hydrogen and infrastructure for renewable energy. Adherence to the Green Loan Principles is increasing for project finance loans as well. In terms of SLLs, we have seen a significant slowdown of companies including KPIs in their facilities. Everybody is in a wait-and-see mode.

Anne van Riel
Head of Sustainable Finance Capital Markets, BNP Paribas Americas 

Although their prevalence is often dictated by the borrower’s jurisdiction and the underlying political and regulatory environment social metrics are increasingly being considered in loan market transactions. 

Hannah Vanstone

Social factors, particularly in developing economies, will rise in importance as finance will be required to help re-orient companies and employees in a just and equitable manner. The rise of social factors will be further supported by increasing regulatory efforts to anchor human rights throughout value chains.

Hannah Vanstone
Senior Associate Director, Loan Markets Association