Speaker 1 00:00:08 Welcome to the Lending Lowdown. I'm CJ Doherty, director of Market Analysis, and this is our fourth podcast in the series. And today we're gonna talk about sustainable finance, primarily focusing on the corporate loan angle. And I'm happy to say I'm joined today by Maria DEOs, head of Global Loans contributions and director of Analysis here at Refinitiv and our E s G expert extraordinaire. So no pressure Maria
Speaker 2 00:00:33 <laugh>. No pressure, cj. Thank you.
Speaker 1 00:00:35 So to kick it off then, e s G has become such a buzzword in the loans world and, and indeed the wider world in the last few years. So I guess Maria, can you, can you quantify how much growth we've seen?
Speaker 2 00:00:48 Yeah, I think that's exactly right. Um, we, we've seen sustainable and green loan pipelines grow astronomically over the last five years. Um, the market went from about 12 billion in, uh, 2017 to a new record at 681 billion in 2021. So it's, it's been accelerated growth.
Speaker 1 00:01:11 Yeah. So that's huge growth. So how did we get here, you know, what, what has been the impetus for the loan market? Indeed, the wider market?
Speaker 2 00:01:18 I think that there are a couple of things that have come into play, um, and, and fueled the expansion. Uh, the first is, is headlines. We're all aware of the environmental concerns and damage as a result of climate change, as well as social inequities based on lack of access to critical services and the like. Um, in the corporate and financial worlds, this sentiment has given rise to more activist shareholders, investors, employees, and basically people want to know that the companies that they're investing in or that they're working for are part of, um, solutions and, and not contributors to the problem. So that's an important mindset. And, and, and, and finally, I think that there's just been a ground swell of, um, support for E S G, and this has in increased, um, regulatory rules and oversight. And, and we've certainly seen that in Europe as a, as a critical driver.
Speaker 1 00:02:18 Okay. Great. And, and I know that e s G lending was really kickstarted in the bond market space, so I guess, you know, what were the drivers there and and do they lend themselves at the loan asset class in the same way? And, and if not, what are some of the differences?
Speaker 2 00:02:32 Sure. Um, I think that's a really good question. I think that the green bond market, which was sort of at the forefront of ESG financing, was fueled by, um, pools of investors and portfolio managers who established internal e s G goals and then, um, sort of created their own dedicated funds, which, um, only invest in green instruments. Um, the loan market in contrast, had less of a committed or green, um, an E S G investor base. So, um, in the loan space, the drivers for growth have largely been, um, framed by the corporates themselves.
Speaker 1 00:03:17 Okay. And, and from my understanding, I think they're, right now we are, what we're seeing is an evolution where the, where the finance and corporate communities are working out how to support E S G objectives without impacting company financial goals.
Speaker 2 00:03:30 Yeah, I think you're exactly right. The, the, the trick is finding the balance. There shouldn't be a trade off between E s G efforts and, um, borrower or corporate p and l goals. So it's, it's striking that balance.
Speaker 1 00:03:45 Okay. Great. And, and so as the importance of e ESG considerations, you know, grow and evolve, what are the biggest considerations that lenders and borrowers take into account when it comes to, you know, deciding whether an ESG loan makes sense or not?
Speaker 2 00:03:58 Sure. Um, I think the most straightforward consideration is use of proceeds. Um, green loans and social loans are premised on very specific, clearly defined use of proceeds associated with greener social undertakings. Um, I think the trickier area is in the context of individual sustainability linked loans. Um, in these cases, the use of proceeds don't come into play, and it all comes down to whether the borrower has a committed e s G corporate strategy and whether they want to align that with financing.
Speaker 1 00:04:39 Okay. And, and following on from that, I I, you know, I think we've seen a variety of borrowers tapping the market for sustainability linked loans, haven't we?
Speaker 2 00:04:46 Yes, we absolutely have. Um, investment grade borrowers, uh, globally have certainly been the backbone of sustainability linked loan, um, pipelines, just to put some numbers on it, um, 35% of investment grade loan volume in Europe included sustainability linked components, um, in 2021. And we've seen sort of similar growth in the us although that's coming off of a lower, um, base. And year to date, about 11% of investment grade US loan volume has e s G metrics associated with it.
Speaker 1 00:05:29 Okay. Yeah. And, and on top of that, I know we're seeing some inroads being made in the leverage loan space too, you know, albeit at a slower pace. Um, progress is definitely occurring in Europe. You know, according to our numbers. Um, E S G lending there has increased from less than 10% of, of total leverage loan volume, uh, a couple of years ago to, to roughly 15% today.
Speaker 2 00:05:50 Yeah. And, and I think that's right, and, and we've also seen sort of similar growth, um, slower but similar growth in, in the us. So just to give an example, in March of this year, Novo X, um, included a 3 billion sustainability linked term loan in its buy buyout financing. So, so we're seeing that same, um, those same inroads being made in in the us
Speaker 1 00:06:19 Right. And, and it's not a straight upward curve though, is it, you know, market for volatil volatility can certainly impact efforts and appetite for E S G loans, and I think we certainly saw that with the onset of covid and the pullback in E S G lending as borrows rushed to secure liquidity to keep their businesses viable.
Speaker 2 00:06:36 That's right. But the, I think the reality is that by the second half of 2020, once the immediate liquidity concerns were addressed, we did see E S G pick up again. Um, 2021 was a record year for e sg volume, in large part because covid served as a wake up call. Um, the, the reality is that the economic and social impact of something like climate change just remains a daily concern. We see it in the headlines. So the focus on E S G is not gonna go away anytime soon.
Speaker 1 00:07:15 Right. And, and it's not just companies being good, just being, uh, you know, good corporate citizens, uh, either, you know, there are borrow incentives in terms of loan pricing as well. I know from our stats, uh, that they show better pricing of two and a half to five basis points for those that meet their e s G goals. Um, but I guess on the flip side, you might have to pay up if you miss a target.
Speaker 2 00:07:37 And that's exactly some of the thinking or the thought process that has to come into play when lenders and borrowers are considering KPIs. Um, you know, on the whole, I think it's, it's really encouraging to lenders when companies like the renewables infrastructure group and Euro NAV in Europe, um, achieve their goals. And we saw that this year, um, ultimately sustainable finance shouldn't be driving the corporate's sustainable strategy. The strategy itself should drive the financing. So lenders want the goals for borrowers to be ambitious, the e s G goals, but they also want them to be achievable.
Speaker 1 00:08:23 Okay. So looking ahead then, what, you know, what's next for ESG on the loan market? What should we expect to see in 2023?
Speaker 2 00:08:30 Sure. Um, my sense is that lenders in particular are gonna be focused on a couple of things. The first I think is the concept of transition loans, which will be interesting to watch. So those are loans that help brown industry names move toward greener business models. And it, it comes with investment and the like. The second is, um, I think it's important to bear in mind that with each passing year, we have more e s G comparables and we're building a history. So the market should be in a better position to benchmark the impact of E S G loans themselves.
Speaker 1 00:09:09 Okay. Uh, thanks Maria for, for all your insights. Uh, very informative. Um, but that's all we have time for today. You know, sustainable finance is a topic we'll be talking more about in the future, so stay tuned. And in the meantime, check out our reports and analysis on this [email protected]
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