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In brief: Investors dubious about ESG-linked loans

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.

Investors appear to be split in half on the issue of whether the perks that borrowers receive from green loans and bonds are justified, write colleagues on affiliate title Private Debt Investor.

A survey from the European Leveraged Finance Association (see here), 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 were “robust and credible”. For green/social/sustainable bonds, 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.