According to professional services firm Grant Thornton, nine out of 10 UK lenders (93%), from the largest clearing banks to smaller alternative finance providers, expect environmental, social and governance - (ESG-) related lending in the mid-market to increase in the next few years. A similarly large proportion of lenders (85%) say that a firm’s ESG status, or its ability to transition to net zero, influenced their credit risk assessments.
The news comes after the Loan Syndications & Trading Association in the US revealed that global loan markets hit a new record with more than $681bn (£555bn) of green and sustainability-linked lending last year, a 275% increase over the $181.7bn raised in 2020. While green lending is clearly established among lenders to larger corporates, some 68% of lenders report that less than 10% of their existing mid-market lending is green or sustainability linked.
But, as the Grant Thornton survey found, this is set to change in the coming years. When looking at new mid-market lending, a third of lenders surveyed say that sustainability-linked loans (SLLs) accounted for 11–25% of new loans being advanced, while 30% of lenders say the proportion of new SLLs was over 26%.
And of the 93% of lenders expecting ESG lending to increase, half say it will increase “significantly”.
“The key point is that there is no doubt that lenders are focusing more and more on ESG matters,” says Jon Bramwell, director of UK Debt Advisory at Grant Thornton. “Large corporates have more bandwidth to deal with this, but if mid-market firms don’t pay attention, access to cost-effective credit will become more restricted.”
Bramwell observes that banks and non-bank lenders have made commitments towards transitioning to net zero by 2050, and that each loan is part of this “transition story”. He adds that this is not just about traditional lenders – private equity funds also want to be able to demonstrate good sustainability credentials.
Not only that, but also mid-market businesses can form an important part of larger businesses’ supply chains and are therefore considered part of their eco-system for ESG measurement. “This will drive ESG right into the heart of the mid-market,” Bramwell says.
“Key performance indicators [KPIs] for ESG performance will be measured every year. This is voluntary at the moment, but that could change in the future,” he says.
Bramwell predicts that failure to demonstrate good ESG credentials could cost borrowers up to 25 basis points on the cost of their credit facilities. At the same time, amid growing fears of ‘greenwashing’, ESG-based KPIs will become more rigorous and suitably challenging.
“Currently, there is no standardised approach to measuring performance as it is a relatively young discipline, but in the future, these will be baked into the lending process, which will have an impact on capital availability for individual firms,” Bramwell says. “Treasurers will be able to help their firms articulate this as ESG becomes an intrinsic part of the process.”
ESG issues were firmly on the agenda at the recent ACT Annual Conference in Liverpool, with a range of sessions devoted to exploring how ESG increasingly informs many decisions made by investors, treasurers, asset managers and banks.
“Sustainability is a such a broad topic, and it’s certainly true that many larger companies have adopted net zero targets, but looking into the mid-market the picture does change,” said Robert King, head of sustainable finance at HSBC at a special session run by international banking group BNP Paribas.
“Those companies generally don’t have that target, although many of them are in others’ supply chain, so that is driving change from the buyers,” he said.
Philip Smith is editor of The Treasurer
