2021 has seen the rapid rise of ESG-linked financings in the leveraged loan market as has been commented on by the ELFA in its latest insights piece - Are ESG margin ratchets saving the planet, or saving borrowers money?.
For those unfamiliar with them, ESG-linked financings are debt financing transactions where the margin payable is linked to the achievement (or not) of ESG Key Performance Indicators (KPIs) or Sustainability Performance Targets (SPTs). These types of margin ratchets reward borrowers for achievement of the KPIs/SPTs (by way of a margin decrease) and hold borrowers to account if sufficient progress is not made (by way of a margin increase).
The ELFA note is a great reflection of the current landscape for ESG financings in the leveraged market and clearly sets out the challenges and opportunities for both lenders and borrowers in putting these types of financings in place.
As the market continues to develop, we expect to see some of the current challenges addressed through greater standardisations of terms and increased themes and familiarity (both general and sector-specific) in determining KPIs/SPTs. There is a real opportunity here for borrowers to develop a meaningful and thoughtful ESG programme and for lenders to help incentivise the implementation of those programmes through ESG-linked financings.