Fitch Ratings, one of the three major credit rating agencies, recently issued a report noting the increasing use of ESG metrics in credit agreements. As the report notes, these provisions are only now being incorporated into U.S. credit agreements, but "similar provisions are commonplace in European credit agreements, where 53% of all loan documents reviewed by Covenant Review in 3Q21 contain some version of an ESG pricing shift mechanism." Further, the report also highlighted that "[s]everal large financial institutions . . . [impose] blanket restrictions on financing certain operations" such as "mountain top coal removal practices or greenfield coal mine development."

This report demonstrates that a focus on ESG concerns--once solely the province of activists--is increasingly being used by the financial services industry. This represents a normalization of ESG matters, and reflects the increased acceptance of these metrics as a standard for determining success in the marketplace.

While many commentators continue to focus on potential governmental and regulatory action--which will doubtless be significant--it is important to maintain a broader perspective, as individual financial institutions (and, indeed, the marketplace as a whole) are incorporating ESG concerns into their current practices even in the absence of specific government regulation. It is hard to see how, even if the government regulations are flawed, ineffectual, or ultimately reversed, it will be possible to minimize ESG concerns in the future.

{ Fitch Ratings observed several recent instances where pricing in U.S. credit agreements can be shifted based on achievement or failure of certain agreed upon Environmental, Social and Governance (ESG) goals. Such provisions operate similar to traditional pricing grids, except in this case it is ESG metrics, and not traditional financial performance metrics, that can potentially augment the interest rate under the document. ESG pegged pricing provisions tend to occur more often within sectors with potential material ESG challenges, such as natural resources and industrial borrowers.