Global standards set in place by loan trade associations this week that tie syndicated loan pricing to companies' sustainability performance are expected to stimulate the budding US green lending market.
Less than a handful of US companies have issued sustainability-linked loans since the first deal for natural gas utility CMS Energy was completed last June, far lagging firms in Europe which are leading the global push to improve environmental performance.
The new sustainability standards, which were issued on Wednesday by the Loan Market Association (LMA), the Loan Syndications and Trading Association (LSTA) and the Asia Pacific Loan Market Association (APLMA), are expected to bolster borrowers' and investors' confidence in green lending.
Sustainability-linked loans are any kind of loans that incentivize borrowers with margin reductions or increases depending on their ability to meet pre-set environmental performance targets.
A lack of direction and consistency in being able to identify and measure these goals has been stifling growth so far, bankers said.
“By having pricing tied to a borrower's improvement in sustainability performance, it directly incentivizes borrowers to make improvements,” said Tess Virmani, the LSTA's associate general counsel. “If market interest keeps gathering steam, then the sustainability-linked loans will find a good home in the corporate loan market.”
One of the main differences between sustainability-linked loans and green loans, which are linked to use of proceeds, is that they can be raised for general corporate purposes rather than specific projects. Loans for general corporate purposes are more widely issued, which is likely to boost sustainability-linked loans.
Key characteristics of sustainability-linked deals include disclosing the loan's tie to the company's overall social responsibility strategy; having sustainability pricing targets arranged between borrower and lender; reporting on sustainability performance and external reviews, according to the new lending principles.
Global water technology company Xylem Inc became the fourth US company to issue a sustainability-linked loan, with an $800 million revolving credit in early March. Xylem is the first general industrial company to commit to reducing its environmental footprint this way.