Companies’ ESG status could hit loans to restructurings
27 June 2024
Lenders may be less likely to support a restructuring if companies do not meet sustainability and emissions criteria, a new report suggests.
When surveyed, 81% of lenders said that a mid-market business’s ESG status or ability to transition to net zero would affect their appetite to lend over the next five years.
A majority, 93%, of lenders said that they think regulators may in the future introduce a requirement to integrate sustainability considerations into a bank’s internal capital allocation models for loans.
Christophe McLean, partner in debt advisory and restructuring at Grant Thornton said that ESG may have been a box ticking exercise in the past, but that is changing. He added: “What we are finding on the restructuring side with banks that are asked to support a company through a restructuring period, is that they look at the business plan, management team and market environment and all of those aspects, but ESG is increasingly also a factor that is considered when deciding whether to continue supporting a business.”
The concept of measuring a company’s performance against environmental, social and governance (ESG) standards became popularised after a UN report titled ‘Who Cares Wins’ in 2004, replacing previous concepts such as corporate social responsibility. It has since slowly become enshrined in financial services via changes to legislation and reporting standard which, among other things, now require large and medium-sized companies to include ESG-related actions and policies in their annual reports.
Jon Bramwell, director in debt advisory at Grant Thornton, said that banks also have ESG obligations and commitments to reach net zero, with some promising to halve carbon emissions by 2030. Borrowers, as part of a bank’s client base, contribute to a lender’s overall carbon emissions, and would need to meet the lender’s targets. He suggests that increasingly lenders are considering ESG factors when determining the longevity of a business.
Bramwell said: “If a mid-market company is trading with a large corporate, the government, or a local government entity, for example, there's a good chance they'll have to satisfy certain considerations with regards to ESG. If they're not able to do that, they run the risk of failing to win or renew that contract, which speaks directly to the profitability of a business, its capacity to service its borrowing obligations and credit risk.
“It is even more important when businesses are suffering financial distress, said Bramwell. A lender can't afford for those businesses to further deteriorate and are therefore focused on the ESG factors as a means of prevention.”
The results were published as part of a survey by Grant Thornton of 50 UK-based lenders about their attitude to ESG and sustainable finance for the mid-market.
Companies in higher emitting sectors are particularly at risk of not being able to get financial support by lenders. McLean added: “If you're a coal producer at the moment, for example, it's actually very difficult to get access to financing from your regular banks. They then look for alternative sources, but even some of those sources have ESG very much at the forefront as well.”
Global sustainability-linked loan issuance – where loan pricing is tied to sustainability metrics – fell 55% in 2023, which is believed to be attributed, at least in part, to concerns around greenwashing and increased regulatory scrutiny. In the UK, the FCA’s sustainability disclosure requirements, known as the ‘anti-greenwashing rule’, came into force on 31 May 2024, and requires claims of positive outcomes for society or the environment to be backed up.
Bramwell added: “We think that one of the reasons [for the fall in loan issuance] is that lenders, particularly on the back of the FCA intervention, are concerned about greenwashing and reputationally can't afford to be arranging soft, sustainability-linked credits with undemanding KPIs and easy access to pricing discounts. They need to be challenging more thoroughly and, therefore, their committees that approve these loans are more rigorous than they were and therefore fewer are being made.”
