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SLLs as a tool for a more sustainable economy

18th March 2024 By Luke Cross
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Sustainability-linked lending is seen as an important tool in the transition to a more sustainable economy.

So quite rightly, there is scrutiny around how the market is functioning and whether sustainability-linked loans (SLLs) – where interest rates are linked to set ESG criteria or KPIs – are meeting potential, along with how we can strengthen their integrity, impact and value for money.

I recently attended a roundtable hosted by Addleshaw Goddard and Newbridge bringing together lenders and housing associations to discuss sustainable finance and how the borrower/lender relationship is evolving in an ESG context.

Some of my takeaways from the event:

1️⃣ One message was that sustainability runs to the heart of the business – and so should be considered as part of core strategy, rather than a standalone or bolt on. Sustainability reporting is here to stay.

2️⃣ There was recognition that sustainability is critical to the future of every business – but that challenging times and immediate financial pressure may mean sustainable finance, in its current form, isn’t the best option. There’s a balance to be struck and work to do on the product.

3️⃣ An interesting discussion about which KPIs are business as usual and which go beyond BAU – and the importance of stretch. This segues into a debate around inadvertent greewash risk.

4️⃣ The ongoing challenge around audit and verification of loan KPIs and ESG data more broadly, including who’s best placed and equipped to provide that service to the sector, and who pays for it. One interesting point was the time it has taken the financial accounting profession to get to where it is today – we’re only really getting started on sustainability from an audit point of view.

5️⃣ Cost benefit is a big talking point – from HAs making the case for banks to provide greater discounts on SLLs; the benefits of sustainable finance in reaching a wider pool of investors (and lenders); and the benefit to lenders of HAs signing up to SLLs and disclosing climate and E data that they use for their own reporting.

6️⃣ A strong message from HAs that a sector like social housing – which has an important role to play in the country’s net zero ambitions – is also helping financial institutions on their own transition journeys.

7️⃣ The potential for ESG to be a two-way street – where lenders are accountable for their own sustainability performance in the same way they ask of their borrowers. One suggestion was that banks link their own sustainability targets to the loans.

Overall, it was a really constructive discussion that reinforced my view that ESG and sustainability is at its best when built around credible, two-way communication and collaboration.