As the volume of sustainability linked loans rises, how can lenders avoid allegations of greenwashing?
Governments and regulators alike recognise that funders have a key role to play in ensuring that capital flows are increasingly focused on those businesses who take seriously their ESG responsibilities. It's therefore encouraging to note the rising volume of sustainability linked loans (SLLs).
Sustainability linked loans typically fund general corporate purposes (rather than any specific "green" purpose) and the borrower benefits from a modest reduction in the interest rate if prescribed sustainability performance targets are achieved. The benefits for borrowers are twofold. In addition to the modest potential financial benefit of a reduction interest rate, a borrower who can publicise that it has secured an SLL enjoys the myriad reputational benefits of being able to signal to its wider stakeholders (including shareholders, customers and employees) that its approach to sustainability has withstood independent scrutiny.
And that's where the danger lies for funders. Some commentators have recently criticised lenders for applying insufficient rigour when making available SLLs. That risk of insufficient rigour also prompted the recent establishment of the Green Technical Advisory Group, focused on tackling greenwashing in the financial sector.
So how can lenders minimise that risk? We suggest that prudent lenders will focus on the following 4 elements.
Green for Go
A focus on the elements outlined above will help lenders to minimise the risk of allegations of greenwashing. Our recent research revealed that banks exercise the greatest influence on businesses when it comes to sustainability [1]. We hope that lenders will seize the opportunity presented by that position of influence and continue and increase their focus on lending which accelerates sustainability while adopting prudent measures to avoid greenwashing.
[1] Survey conducted in late 2020 and early 2021 under the ethical research guidelines set by both the MRS (Market Research Society) and ESOMAR (European Society for Opinion and Market Research). The sample included 550 senior business leaders and 450 finance leaders (including investors, banks and insurers) based in the UK, Germany, the Netherlands and France.
