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Sustainable financing

Demands, incentives and enthusiasm for sustainable business continues in 2022, and Environmental, Social and Governance (ESG) factors are an increasingly common feature within financing. Even during the Covid-19 pandemic, ESG remained a key focus in the lending market resulting in a significant increased volume of loans with incentives or requirements related to sustainability.
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A huge number of global and national initiatives have been made to appropriately handle sustainability challenges, including the European Green Deal and the relating Taxonomy. Both mandatory regulations and voluntary principles have been (and will continue to be) initiated and implemented, to ensure or encourage that ESG considerations also are taken into account with respect to financing.

Increasingly, financial institutions and certain other enterprises will also need to assess, monitor, document and disclose the sustainability of their investments (albeit a sustainable financing may not necessarily mean that the underlying activity is classified as “sustainable” under the Taxonomy).

Today, we generally divide sustainable financing between green loans and sustainability linked loans.

The term “green loan” (or green bond) usually refers to financing made for the purpose of a project or investment that makes a substantial contribution to an environmental objective.

The term “sustainability linked loans”, on the other hand, refers to financing which contain a feature whereby the performance of the borrower/issuer is measured against certain external ESG related “key performance indicators” (KPIs). This is intended to incentivise the borrower/issuer financially by for example linking the interest margin to the improvement of its ESG score.

The volume of both these types have grown steadily over the last years although the potential for sustainability linked loans is larger due to the simple fact that the number of corporate financing is higher than the number of qualified projects and investments. Due to the considerable focus on sustainability , the development of hybrids and new products and services within sustainable financing will also continue going forward.

Principles and guidelines have been provided to support various types of sustainable financing, including by the Loan Market Association. Such generally accepted principles and guidelines gives a predictable and transparent framework which ensure the results are measurable and comparable which again incentivise new sustainable financing.

The area of sustainable finance is changing with new incentives, requirements and guidelines being made available on a regular basis. The increase of lending volume with a sustainability linked feature might indicate that we soon may come to a point where it is no longer usual to distinguish between traditional and sustainable financing. Going forward, it will be paramount for borrowers/issuers to stay up to speed on these issues to secure new financing on beneficial terms.