Investors appear to be split in half on the issue of whether the perks that borrowers receive from green loans and bonds are justified, affiliate title Private Debt Investor reported.
A survey from the European Leveraged Finance Association, which quizzed 170 credit investors in Europe – 90 percent of which owned bonds or loans incorporating environmental, social and governance provisions – found that just over half (51 percent) believed that the structure and targets for sustainability-linked bonds (SLBs) were “robust and credible”. For green/social/sustainable bonds (GSS), the figure was 55 percent.
The main investor concern was that companies may be able to reap the benefits of “greenium”-style interest savings while avoiding meeting, or even testing, key performance indicators. They are able to do this by issuing instruments that are callable before the KPI target date.
Over a third of investors (37 percent) said between two and five years was an appropriate timeframe for a borrower to test KPIs, while 25 percent said less than two years (which would almost certainly fall within the non-call period). A further 30 percent said it should be case-by-case, with no absolute timeframe.
Of investors, 90 percent said it would not be appropriate to change ESG KPIs in the event that an issuance turns out to have strong demand.
“The market for SLBs and GSS bonds is still in its infancy, with financial conditions and KPIs continuing to develop,” commented European Leveraged Finance Association chief executive Sabrina Fox. “An issuer’s proposals must be robust and ambitious enough to guarantee the integrity of the product and limit greenwashing risks,” she added.
Reporting, in particular, merits some attention, Fox argued.
“Regularity of reporting may be a cause for concern for issuers, with many currently reporting ESG information only once a year, or even less given the time-consuming nature of ESG-related KPI data collection. Most issuers will report annually as part of their annual sustainability report. However, we note there is an absence of reporting covenants tied to sustainability performance targets, meaning no contractual obligation to report on these. Reporting is key for investors to be able to hold issuers to account and to combat risks of greenwashing.”