The explosive growth in sustainability-linked loans has exposed a number of shortcomings that need to be resolved in order to avoid greenwashing, according to the global head of sustainable finance at Danske Bank A/S. Picture: BLOOMBERG
Among those risks is the “quality of criteria” that determine the interest rate on the loans. As with their cousins in the bond world, sustainability-linked loans carry a rate that’s linked to key performance indicators, rather than the strict use-of-proceeds model associated with green bonds or loans. The somewhat laxer requirements have lured a broader range of borrowers, including corporate behemoths such as Ford Motor Company.
A Bloomberg News survey with 50 borrowers and lenders signalled that almost half of respondents think two KPIs are sufficient for a deal, while 17 think there should at least be three targets. Participants also said they preferred specific performance targets over more general ESG ratings. Meanwhile, Danske’s efforts to persuade clients to subject themselves to an external verification process often fall flat. The process “easily starts to back-pedal and the client says maybe we don’t need this at all”, Slotte said. Ultimately, “it is typically a cost issue”.
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