U.S. companies are far behind companies in Europe when it comes to issuing sustainability-linked loans, reported Reuters.
According to a report in Reuters, new global standards set in place last week by the Loan Market Association, the Loan Syndications and Trading Association and the Asia Pacific Loan Market Association are seen as a way to increase the number of borrowers for these type of loans as well as investors’ confidence in lending to green companies.
According to the report, sustainability-linked loans are ones that give borrowers an incentive to reduce margins or increase them depending on their ability to meet environmental performance targets that are preset. A lack of direction regarding the loans has hurt growth of these types of loans, reported Reuters. “By having pricing tied to a borrower’s improvement in sustainability performance, it directly incentivizes borrowers to make improvements,” said Tess Virmani, the LSTA’s associate general counsel, in the report. “If market interest keeps gathering steam, then the sustainability-linked loans will find a good home in the corporate loan market.”
According to Reuters, a big difference between sustainability-linked loans and green loans is that sustainability loans can be used for general corporate purposes instead of specific projects. Since loans for general corporate purposes are issued at a greater rate, its expected to increase the amount of sustainability-linked loans that are issued. Companies do have to disclose how the loan will be used to further a company’s social responsibility strategy, include sustainability pricing targets, report sustainability performance and adhere to external reviews, noted the report.
The report noted that Xylem, the global water tech company, was the fourth U.S. company to issue a sustainability-linked loan via a $800 million revolving credit, which it inked earlier in March. Of the four sustainability-linked loans issued in the U.S., two happened this year and two in 2018 for a total of $8 billion, reported Reuters.