Responsible Capital An ESG Loans insight report Chart 1 Chart 2 Industry sectors Types of margin adjustments on SLLs Shipping 8 Financial investors 1 11 Technology 3 Asset and wealth Reduction 3 management 19 Both 7 Life science and 18 Increase 4 pharmaceuticals Commodities 4 6 4 Infrastructure 22+14+12+8+8+8+6+6+16+F 50+47+3+F Power and utilities Other As a large law firm, we work in a wide variety of sectors. The Sustainability-Linked Loan Principles (SLLPs) As we would expect, given the ubiquity of ESG and provide that a key characteristic of an SLL is that an sustainability in recent years, we are seeing ESG Loans “economic outcome” is linked to whether the relevant across all industry sectors. sustainability targets are met. The SLLPs do not specify It is notable that shipping and financial investors are the what that “economic outcome” should be. In practice, most common sectors in our data set. Clients in both of in the vast majority of cases, that outcome is an these sectors have embraced the opportunity to borrow adjustment to the Margin. ESG Loans to show their sustainability credentials and to In the early days of SLLs, we generally saw downward- decarbonise their businesses. For both sectors, the vast only Margin adjustments. This made SLLs popular with majority of these ESG Loans were SLLs. This makes borrowers because there was no risk of a price increase, sense given the fact that SLLs do not have a “use of regardless of their sustainability performance. However, proceeds” requirement, so are more readily accessible in the last year or so, we are increasingly seeing lenders than green loans. insist on Margin increases for bad performance along with Based on our data, we have seen lower number of ESG Margin decreases for good performance (known as two- Loans from resource-intensive industries (commodities, way Margin adjustments). While this is not required by the power and utilities and oil and gas), but we expect that to SLLPs, lenders are using two-way Margin adjustments in increase as transition plans for companies in these sectors an effort to bolster the integrity of SLLs as a whole. develop. Our data set shows a fairly even split between “downward- Green loans in particular are being utilised in the only” and two-way Margin adjustments*. As our data set renewables sector and SLLs and social loans are of grows, we hope to track changes in Margin treatment in interest to those in the commodities sector, particularly for SLLs over time. We expect to see more two-way Margin supporting low income farmers and producers in improving adjustments in future. crop yields (which is one SLL we have worked on). * The “increase only” ESG Loan included in Chart 2 was due to the particular circumstances of that loan. Essentially, the transaction was structured so that the Margin would not be adjusted if the sustainability targets were met, but would increase if they were not met. 03