Responsible Capital An ESG Loans insight report Chart 6 The overall story from our data is that Margin adjustments Spread of margin adjustments on SLLs are generally very small in SLLs – typically a few basis points (1 basis point being 0.01%). % 0.150 However, one feature we did not expect to see is that there 0.100 is generally a wider spread of Margin adjustments for two- way Margin adjustments compared to SLLs with downward- 0.050 only Margin adjustments. It is not immediately clear why this 0.000 should be the case, but perhaps lenders are willing to allow for a greater downside (i.e. decrease of loan margin), if they –0.050 also get the benefit of a upside (i.e. increase in loan margin). –0.100 It is worth noting that increases in Margins in SLLs (for –0.150 poor sustainability performance) can cause a conundrum for lenders. Whilst receiving a higher rate of interest would Decrease (downward-only Margin adjustment) normally be welcomed by a lender, for reputational reasons, Decrease (two-way Margin adjustment) a lender may not want to be seen to be profiting as a result Increase (two-way Margin adjustment) of poor sustainability performance of a borrower. So what Average should happen to the increased interest? We have sometimes seen documentation which addresses this issue by providing that Margin increases are to be set aside and donated to charity. On its face, this is an elegant solution. However, in practice it can cause lenders further difficulties, as it then puts the onus on lenders to ensure that (a) the charity in question is doing good work and (b) the funds are actually being deployed in the intended manner. Other solutions to this problem include having the borrower set the extra money aside and apply it for an agreed green/ sustainable project (which may or may not relate to the sustainability performance targets in the ESG Loan). This adds an administrative burden to the lenders in monitoring use. In other cases, lenders will simply accept the extra interest. We will continue to monitor how this issue is dealt with as the ESG Loan market matures. 05