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ESG in the loan market in 2023

ESG-related considerations have, over the past few years, come to play an increasingly important role in the loan market. Lenders are now more focussed than ever on the sustainability profile and strategy of prospective borrowers, in order to inform their own credit analysis as well as to meet their ever-expanding internal and external reporting requirements. This has resulted in increasingly extensive ESG-related due diligence at the pre-contract and marketing stage on all loan transactions. On top of that, increasing numbers of borrowers and lenders are entering into loan transactions with specific ESG features, or in other words, green, social and/or sustainability-linked loans.

At the end of 2022, you would have been hard pushed to find a single European loan transaction which did not involve some form of ESG-related discussion pre-signing. And the focus on ESG in the loan market continues in 2023, with a number of important developments from 2022 expected to take shape and a number of further developments on the horizon.

ESG Due Diligence Template

In November 2022, the ESG Integrated Disclosure Project, an industry initiative aimed at promoting greater harmonisation and consistency of ESG disclosure in lending transactions, launched an ESG due diligence template comprising a set of general industry-agnostic questions applicable to all borrowers and a set of industry-specific questions. The aim of the template, which is freely available to all market participants, is to provide borrowers with a means to report ESG information to their lenders in a standardised manner, while at the same time ensuring that lenders have access to consistent and meaningful data.

The template is likely to be welcomed by borrowers who have often, up to now, found themselves having to complete multiple information requests from lenders in different forms. The template has not however, as yet, been tested and it therefore remains to be seen during the course of 2023 how it is implemented in practice and whether it does indeed serve to streamline the due diligence process for borrowers.

LMA's Green, Social and Sustainability-Linked Loan Principles

Turning to the green, social and sustainability-linked loan markets, an update to the LMA’s Green Loan Principles, Social Loan Principles and Sustainability-Linked Loan Principles, together with the accompanying guidance documents, is expected early this year. The aim of the update is two-fold: (i) to bring each set of Principles into line with the equivalent Principles published by ICMA for the bond market and (ii) to address recent trends and developments in the green, social and sustainability-linked loan markets.

In addition to updating its principles and guidance, the LMA is also working to (i) publish template drafting for sustainability-linked loans, in order to improve efficiency, achieve greater consistency and make the product more accessible to a wider pool of borrowers, and (ii) develop its thinking and guidance around transition finance in the loans context in recognition of the ever-growing importance of transitioning to a net zero economy and the increasing focus on individual transition plans to achieve this.

ESG set to dominate loan discussions in 2023

We will have to wait some time to determine the precise impact of all these developments on the loan market. There can, however, be no doubt in the meantime that ESG considerations are set to continue to dominate discussions on loan transactions into 2023 and beyond. Borrowers and lenders should ensure that they keep abreast of the latest news and developments in this space so that they don’t fall behind the curve.