In April 2017, when Unibail-Rodamco and Philips brought the first large deals that gave them a price benefit for becoming more sustainable, few if any loans bankers dreamt that this would become their star product — one of the few bright spots in an otherwise deal-deprived market.
Soon, it will look weird for a company not to introduce sustainability language on its core revolving credit facility.
Yet, despite the Principles for the market devised by the Loan Market Association and its US and Asian peers, the market is still feeling its way in the dark. How it works is crystal clear. The difficult bit is the content: how much sustainability improvement is enough to count as credible, robust, ambitious?
The associations are drafting new guidance on ambition. This is very welcome. But it will be hard for the LMA to be specific. Companies and their sustainability initiatives are too varied.
The real problem is the borrower-bank relationship is not a normal commercial negotiation. Loose terms make no difference to the banks, so they are always tempted to just help their clients and do the deal, scrapping for their share of a dwindling market. Some banks try to be honourable and tough, but really they are acting pro bono on behalf of the environment.
To solve this governance conundrum, the market needs ESG rating agencies to step up to the plate. They should work out criteria for what is ambitious, sector by sector. There should be several grades, and each deal should have ratings from multiple agencies.
Banks will be delighted to outsource the duty of keeping the market honest. It’s a great opportunity for the raters. The banks just need to insist on it.