Green shoots of ESG-linked lending appearing in fund financing

17 June 2020

Substantial developments towards environmental, social and governance (ESG) principles have been incorporated into all types of financial products across the market during the last year. As noted in previous blog posts, major finance industry associations are establishing ESG-linked financing guidelines and standards to develop the market and standardise approach and regulators are turning their attention to codifying their monitoring. As regulatory requirements across Europe develop, investors are making their voices heard and demanding their investments have a positive impact on ESG issues.

The seeds sown at industry wide level are now bearing fruit in the fund financing space. Standard Chartered announced their first impact-focused subscription facility agreement earlier this year, and a consortium of lenders including BNP Paribas and SEB Group have just announced a milestone €2.3bn (with an upper limit of €5bn) ESG linked bridge facility to EQT:

These new facilities reflect how investors are increasingly focusing their attention on cleaner and greener investments and show how focused financial products can support this – ESG provisions and obligations have been set out in side letters for some time and are increasingly becoming a key driver in funds’ investment focuses. This is only likely to continue: public feedback sessions have just been launched by the European Commission for six proposed delegated acts related to sustainable finance – including proposed regulations and directives on the obligations on investment funds to provide clear advice on the social and environmental risks and opportunities attached to their investments. As funds are required to publish more data on the sustainability aspects of their investments, including their financing, investors will pay close attention.

Given investor interest and vocal support by industry and government bodies, we expect to see an increase in ESG-linked fund financing in support of overall ESG fund principles: these green shoots seen so far are only going to grow.