Despite a slowdown in sustainable lending in the third quarter, the market is showing signs of life and a growing maturity as tighter principles produce more credible transactions, according to ING.

Volume of US$130.5bn in the third quarter for sustainable lending, which includes sustainability-linked loans and green loans, was down from US$204.9bn in the previous quarter but up from US$111.5bn in the third quarter of 2023, according to LSEG LPC data.

Sustainable lending is currently on track to exceed 2023 after US$579.6bn of deals were logged in the first nine months of the year, compared with US$458.9bn in the same period last year as demand for SLLs remains consistent and green loans continue to grow.

In February 2023, the three global loan trade associations updated the voluntary principles for the green, social and sustainability-linked lending in a move that increased the requirements for ambition and materiality in setting targets and external verification. Volume slowed in response, but anecdotal reports suggest that deals are now more robust.

"We have heard that the robustness and calibre of SLLs coming to the market has improved. The principles are now in a strong position and effectively set the tone for improving the credibility of labelled transactions. This in turn should facilitate SLLs scaling again in 2025," said Gemma Lawrence-Pardew, head of sustainability and director of legal at the Loan Market Association.

A further update to the green, social, and sustainability-linked loan principles is expected to be published by the second quarter of next year, Lawrence-Pardew said.

Despite the third-quarter slowdown in sustainable lending, ING saw reasons to be optimistic, including new names coming to the market, with some large deals for data-centre providers.

Switch, which provides AI, cloud and data centres, closed a US$4.25bn sustainability-linked borrowing base facility and increased its revolving credit facility to US$770m in September. Cyrus One, a global data centre owner, closed a US$7.9bn sustainability-linked warehouse credit facility in July that will fund existing and future development projects in the US.

"Sleeping SLLs"

Companies that are returning to the market to refinance existing SLLs are having to meet higher standards and face scrutiny from banks' sustainability teams as they update and refresh KPIs, particularly around Scope 3 emissions from issuers' full value and supply chains.

"Where possible, we should be trying to incorporate Scope 3, but it shouldn't be a barrier to proceeding," said Arash Mojabi, UK lead for sustainable finance at ING.

Companies that are returning to the market have the option of keeping existing KPIs and adding additional targets, or revamping their deals to add more material KPIs to match advancements in their sustainability strategies or more commonly are restructuring their transactions from scratch.

Some companies are opting to put in "sleeping SLLs" that allow sustainability features to be activated at a later date, which is particularly useful for larger companies that are overhauling their sustainability strategies and data reporting in preparation for the Corporate Sustainability Reporting Directive and are setting new KPIs on a global level.

"One thing we are definitely seeing is three material KPIs – we're seeing a lot of deals moving towards this," Mojabi said.

Preparations for CSRD are increasingly driving companies' approach to sustainable financing ahead of the first disclosures in 2025 (for the 2024 financial year), according to the European Sustainability Reporting Standards.

Most large corporates have already created administrative units in charge of ESG information and have developed sustainability plans with mid to long-term objectives, which will continue to improve sustainable loans along with ESG KPIs and assessments that are available on the market.

Climate change, particularly reducing emissions, is the most frequently addressed topic in ING's sustainability-linked loans, followed by a workforce focus with KPIs primarily addressing diversity and inclusion as well as health and safety, the Dutch bank said.

Some SLL refinancings are extending the scope of sustainability-linked instruments. ING acted as sole sustainability co-ordinator for the update and extension of A$1.7bn of sustainability-linked loans for Ramsay Health Care in July, which refreshed KPIs relating to emissions, energy usage, on-site renewables, supplier sustainability, performance and mental health training.

Ramsay also developed a sustainable deed poll, creating a common framework that can be applied across all future sustainability-linked financings, including derivatives and guarantees, allowing easier and more efficient access to the sustainability-linked structure over time.

Source: IFR