Sustainable finance trends

What sustainable finance trends will we see in 2022? How might they build on existing trends and what might be new?

James Hamelin: “Client interest in sustainable finance products continues to grow, building on the momentum in 2021. We are seeing this across all client types, from small-to mid-cap managers to large cap. Many of our conversations with clients are to ensure they are aware of requirements for sustainable finance products. This helps accelerate thinking around their ESG (environmental, social and governance) strategy and ensure they have the data for us to incorporate their key strategic priorities, as tailored KPIs (key performance indicators) within a facility. I hope that we begin to see collaboration and alignment in standards and requirements in ESG.”

Bradley Davidson: “While tackling climate change holds the top spot, ESG covers more than climate, and investment is needed to accelerate sustainable development. I hope we will see funds implementing a greater range of KPIs, such as biodiversity measures, as their strategies mature and further opportunities present themselves.

“The sustainable finance market will continue to produce innovative structures to incentivise ESG-progressive activity. I expect to see greater utility of the Social Loan Principles developed by the Loan Market Association (LMA) in 2022. The early issuance of ‘blue bonds’, supporting oceans and a healthy blue economy, may give rise to blue loans as funds recognise the importance of natural capital to a thriving economy. I’m encouraged by conversations with peers across the industry, as we recognise this is the start of the journey and continue to drive ESG through collaboration.”

At what level does sustainable finance need to happen in the alternatives space?

JH: “Public companies are facing increasing pressure from stakeholders to become more sustainable. The alternatives sector has a key role in helping the private market, and sustainable finance is beginning to become more of a focus here and will undoubtedly play a key role, with attention gained from the very top. The main products are green loans, where funds are made available exclusively for the use to finance or refinance a green project, and sustainability-linked loans, a loan which has predetermined sustainability objectives for the borrower.”

BD: “We are also seeing the rewiring of the financial system to recognise the impact across ESG factors. The Bank of England’s initial Climate Biennial Exploratory Scenario recognises the financial risk of climate change to market participants and the real economy, with the PRA (Prudential Regulation Authority) recently stating it will review existing capital frameworks to ensure they are sufficient to address the ‘material and increasing’ risk posed by climate change.

“We’ve always prioritised a relationship-led approach for our customers and this extends to ESG. Banking partners across the industry must evolve with the needs of their customers so this relationship remains as important as ever”

Bradley Davidson, ESG Lead, RBS International

“Capital providers are responding by introducing climate risk as a key consideration; this will have a direct impact on funding flows and funds will need to show they can manage climate risk to efficiently attract capital. Soon all finance will be sustainable finance, so engaging with banking partners through sustainability-linked and green loans is a helpful process.”

Which products are the most active now, and why?

BD: “Sustainability-linked loans remain the most attractive option for funds to align ESG and funding strategies. Customers are attracted to the flexibility of revolving credit facilities, and sustainability performance targets can be streamlined alongside the traditional deal process. We are seeing an increase in the number of ESG-ready facilities, documenting intentions to convert into a sustainability-linked loan following execution. This ensures the requirements of a sustainability-linked loan do not delay receipt of funds where there are near-term financing needs.

“Interest in green loans continues to simmer. These require a specific ‘use of proceeds’ element to align with green activity or projects. Additional work is needed to comply with the LMA’s Green Loan Principles where a fund wishes to retain the flexibility of a revolving credit facility. A green loan framework may be required in some cases to outline eligible activity that can benefit from the favourably priced green tranche.

“Funds and their banking partners must prioritise the integrity of green loan products or face potential reputational damage. We expect that this market will develop throughout 2022 as innovative solutions continue to arise and funds increase the level of green investment.”

How great is investors’ appetite for sustainable finance? To what extent are market expectations changing and what factors are at play?

BD: “Over the last 12 – 18 months, we have witnessed a shift in investor expectations relating to ESG. The most sizable change is a move from accepting qualitative statements of intent for ESG factors to increasingly requiring quantitative evidence. Investors recognise that the benefits of a robust strategy extend beyond ESG factors and often deliver more stable returns. The alignment of ESG and funding strategies, through sustainable finance instruments, demonstrates forward thinking from the fund management team that investors may view favourably.”

JH: “Many fund clients are citing their investors’ appetite as a key rationale for sustainable finance: it satisfies existing investors and helps attract new ones. There is only a modest margin reduction when you net this off against the additional costs, such as legal, reporting and independent verification of data. Clients are entering into these products not for economic gain, but to demonstrate to investors, employees, regulators and the wider market that they are taking this seriously. Limited partners are increasing their ESG diligence when reviewing general partner relationships and I expect this trend to continue.”

How are different parties in the investment ecosystem collaborating to make sustainable finance endemic?

JH: “All stakeholders are on this journey together and still finding their feet, as sustainable finance remains in its infancy. Everyone is being held to account by someone: banks by regulators and fund managers by investors. This accountability and positive pressure should in theory help to push everyone in the right direction.

“Ultimately, everyone wants to get to the end destination, but there could be more clarity on how to get there. There are currently many different standards and some participants feel overwhelmed when deciding on their best path. This is where participants will need to support each other until sustainable finance becomes the norm.”

BD: “Coalitions such as the Net Zero Banking Alliance, representing 40% of global banking assets, or the Net Zero Asset Managers initiative, representing $57.5trn assets under management, demonstrate the scale of change and collaboration under way across the industry. COP26 shone a light on the effectiveness of working together so I’d encourage funds to engage with the conversation.

“We’ve always prioritised a relationship-led approach for our customers and this extends to ESG. We are on this journey with our customers and have seen a distinct change in the granularity of ESG discussions over the past year. Banking partners across the industry must evolve with the needs of their customers so this relationship remains as important as ever.”