Businesses of all sizes (and their key stakeholders) are asking how they should respond to an ever-growing list of environmental, social and governance issues (ESG) concerns, in a way that produces positive results not only for society as a whole, but also for their business, their customers, their management, their employees and their investors. What has become clear over the past 12 months is that it is no longer enough to pretend to voice ESG concerns – and can in fact be a dangerous game for companies if their public policies and statements aren’t. not supported by business conduct and investment decisions that produce measurable ESG benefits. Companies that get it wrong are often given the dreaded “greenwasher” label, causing material damage to their reputation and even leading to potential liability for those companies and their directors.
This same dynamic is also increasingly relevant in the rapidly growing Australian sustainability lending (SLL), with triumphant press releases celebrating landmark SLL deals from parties involved one day, being publicly questioned the next day for not being sufficiently ambitious or impactful in the minds of other market watchers. As in everything, perception is a reality in the eyes of the beholder (or the public press!) And such accusations (even if they are unfounded) can be just as damaging to the reputation of a borrower (and of its SLL lenders) than those that are well supported. . Such reputational damage could mean that a borrower who receives a “green laundering” fee finds himself jumping through additional ESG reports and external review hoops in their SLL documents for a relatively limited reputation benefit for a while. the duration of his SLL financing (not to mention that he may have difficulty refinancing with another SLL package at maturity).
So how does a corporate borrower (or its sustainability coordinating banks and other advisers) avoid “green laundering” accusations on their exciting new SLL deal? The answer to this question is to anticipate and structure around the factors that lead to such critiques in the context of an SLL. To help borrowers, lenders, and advisers in this regard, below we’ve outlined some key considerations and suggestions borrowers should take into account when considering and structuring an LTC.
- SLL KPIs must be specific to the company’s ESG concerns – the selection of SLL key performance indicators that do not have a sufficient link with the main ESG concerns relevant to the company or the sector in question are likely to attract criticism. Successful SLLs will include KPIs that align with a strong and thoughtful corporate ESG policy or strategy that is prepared and in place before SLL KPIs are formulated. Such a policy can take several months to be properly formulated. As such, borrowers who plan to enter the SLL market in the short to medium term should look to develop and refine these internal ESG policies and functions now.
- SLL KPIs should be ‘worthy’ ESG considerations – a variant of the above, the KPIs selected in an SLL must avoid ESG problems (or the alleged solutions to these problems) which are considered to have a questionable ESG advantage, or which a borrower would have to satisfy in the ordinary course. For example, a KPI of carbon neutrality that can be achieved by purchasing low-quality carbon offsets, or a KPI that simply requires the company to comply with already binding laws and regulations, or to meet carbon standards. basis of business conduct. Observers will see these KPIs harshly in evaluating an SLL package.
- SLL KPI targets must be “ambitious” – the requirement of “ambitious” goals is expressly included in the APLMA SLL principles, so this is really a basic requirement for SLLs, but even when the selected SLL KPIs are the “right” ones for the company, a borrower can be criticized if the KPI targets are not set at a level considered by observers to be sufficiently impactful. It is not enough for a borrower to simply continue on their existing fulfillment trajectory against a particular SLL KPI. Market watchers will expect KPI goals to be a “stretch” that require positive steps to be achieved.
- Borrowers in “brown” sectors must redouble their efforts – in our experience, borrowers from “brown” sectors (eg mining, oil and gas, non-green energy, transport, etc.) seeking to implement an SLL structure will be judged more severely than borrowers from companies in other “greener” sectors. Fair or not (and in fact, improving ESG for ‘brown’ borrowers offers the greatest potential for ESG impact), it’s a reality that stakeholders and market watchers will pay much more attention to. the stages and public declarations of these borrowers on ESG (and particularly environmental) issues. All that can be said about this is that borrowers in “brown” sectors must redouble their efforts to structure their SLL financing so that they are flawless, especially on the three points above. Our other suggestion for these borrowers should be measured in their publicity regarding their new SLLs, as bold and festive statements in the press can often invite further scrutiny and (sometimes unwarranted) criticism from stakeholders and others. market watchers with axes to grind.
A premonitory Kermit the Frog once pointed out: “It’s not easy to be green” and it is not easier for companies to respond to the ESG challenges that many are currently facing. While SLLs are an exciting and powerful tool to incentivize positive ESG results, borrowers need to ensure that they don’t create more ESG headaches for themselves by becoming known as “green laundering”. The above provides some thought bubbles for borrowers on how to avoid these pitfalls, but to ensure that your SLL is structured successfully, we recommend that potential SLL borrowers engage early and fully with their internal compliance functions. sustainability issues, as well as with their external advisors, including sustainability consultants, external assessors, sustainability coordinating banks and legal advisers.