The past few years have seen a continuous growth in the Asian fund finance market in the use of environmental, social or governance (ESG) or sustainability-linked lending (SLL) facilities.
Apart from syndicated facilities or those with higher values, green elements have also been incorporated in bilateral or smaller facilities. Investment approach has become diverse too, leading to an increase in performance-based facilities where pricing is often pegged to performance against an agreed set of key performance indicators (KPIs) and use of proceeds facilities which provide for pricing incentives for loan facilities used for ESG-related purposes.
Setting KPIs and in some cases sustainability performance targets (SPTs) are no easy tasks – the UK and EU have sought to create certain frameworks or requirements relating to criteria, classification and disclosure of sustainable products. Asset managers, owners and general partners (GPs) are incorporating ESG in their portfolios as well as their own investment processes. Likewise, lenders in the APAC region are becoming more willing to support GPs in the implementation of green strategies. It is important for lenders to fully understand the ESG capabilities of the GPs and support them in their development so as to meet any KPIs and SPTs. Lenders would want to approach sustainability in good faith and avoid being seen as investing in ESG solely for monetary gains. Indeed, lenders should beware of the risk of "greenwashing" (the provision of misleading environmental claims or information about the sustainability of a product or service) which may lead to investment, regulatory and/or reputational damage.
There is little doubt that ESG will continue to grow in fund financing, and we will expect relevant regulations and guidelines to be refined and market norms and practices to be developed. One major challenge remains the setting of sufficiently robust KPIs and SPTs in SLL financing to avoid any greenwashing concerns. Detailed documentation of the ESG framework and clear metrics would be crucial in this regard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
