Negotiations between borrowers and lenders on KPIs associated with sustainable financing reflect the growing pressure from authorities on both banks and institutional investors to act to shape a more responsible society.


The share of sustainable bonds in global debt issuance has doubled so far in 2021, up from an average of 5% in 2020 to 10% in the first quarter, confirming that ethical and responsible considerations are increasingly being integrated into corporate finance strategies.

This week, the French Financial Markets Authority (AMF) approved a bond prospectus allowing Sustainable Linked Bonds (SLBs) to be admitted on Euronext Paris for the first time. SLBs are debt securities that provide a financial incentive for the issuer to commit to a more sustainable business model. Unlike green bonds or social bonds, where the funds raised finance a particular project, SLBs automatically pay an increased coupon at a pre-determined date if the issuer fails to meet the sustainability targets (like reduced carbon emissions) it set when the bonds were issued. These quantified sustainability targets are set through Key Performance Indicators (KPIs) that are defined in the prospectus.

SLB issuance has grown over the past few months in Europe, mainly through private placements that do not require a prospectus. SLB issuance is likely to become more important as it extends to regulated markets, the French regulator argues. SLB issues accounted for around 25–30% of the total USD 500 billion of sustainable debt issued around the world in 2020, with green bonds (40–45%) and social bonds (30%) making up the remainder, according to Eikon Refinitiv.

The USD 150 billion of SLBs issued in 2020 is a sizable amount, but it was concentrated in fewer than 150 issuers. Since the beginning of this year, SLB issuance rose by 48% compared with the last quarter of 2020, and the market welcomed a number of high-profile new European issuers such as Rexel, Berlin Hyp, Natura and Co – Body Shop.


Flexible debt instruments to help meet the challenges the world is facing

The past 12 months have seen rapid changes in the policy and regulatory environments that have been designed to help the financial world increase its social and environmental responsibility. More tolerant of inflation, the new monetary strategy that the Federal Reserve unveiled in August 2020 intends to tackle inequality through a more inclusive employment mandate. Meanwhile, the 87 other central banks that met last year at the Jackson Hole economic symposium reaffirmed that fighting climate change is among their priorities. Global warming is seen as a threat to financial stability by central banks.

In the future, the link between monetary policy, credit distribution and sustainability issues is likely to strengthen. Several banks have anticipated this development and intend to “green” their balance sheets, reserving enhanced allocations for sustainable financing. This is clearly visible in continental Europe – notably in Italy, France, Sweden and Belgium. More than 40% of the syndicated loan volumes signed in Europe between October 2020 and March 2021 included ESG criteria (20% by number of transactions). Sustainable linked-loans (SLL), which are general-purpose loans that integrate compliance with ESG objectives adapted to the borrower’s situation, are driving this trend and are today well ahead of green loans and social loans in terms of volume outstanding.

In the first quarter, French banks completed the first climate stress test that the French regulator requires them to undertake, and a similar test will be extended to all European banks in 2022 under the guidance of the ECB and the Bank of England. On the investor side, the disclosure regulation of the European Commission’s Sustainable Finance Action Plan from November 2019 requires asset management companies to present how they take into account the risks associated with climate change and the loss of biodiversity. It also requires them to communicate on how they consider the negative impacts on the environment of their investment policy.

Against this backdrop of growing pressure on both banks and institutional investors, negotiations between lenders and borrowers on the targets included in Sustainable Linked Loans and Bonds are getting tougher.

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