3 steps to follow ESG criteria as a bank/investor
"Sustainable finance" has been on everyone's lips in recent years, and with good reason. Not only is our era faced with a collective awareness that is changing mindsets and decision-making. But also, the legal framework is evolving on this theme, encouraging banks and investors to review the way they structure their financing.
In this societal transformation, banks obviously have a central role to play. This is particularly the case in the introduction of financing indexed to sustainability criteria. However, like any emerging practice, the methodology is still unclear and the associated jargon sometimes nebulous... We propose to detail three steps for setting up and monitoring these sustainable financings, in order to better understand how they work and how they are applied.
Step 1: know your customer, and define their ESG commitments
As a lender, a bank has a duty to study the sustainability strategy proposed by the borrower to ensure that there is a real promise and that it is not "impact washing".
Once this study has been carried out, the bank plans financing indexed to sustainability criteria (also known as ESG criteria). These are financings to which contractual commitments are associated, with defined sustainability objectives. Whether or not these targets are met will have an impact on the interest rate. If they are completed, the borrower will see the margin applied to his rate fall.
These objectives are represented by KPIs (Key Performance Indicators) and SPTs (Sustainability Performance Target). The former are measurable indicators, the latter are thresholds to be reached for each KPI, during the financing period.
2nd step: agree on ESG criteria
If the financing is structured, several lenders may be involved in selecting the KPIs. This is referred to as a syndicated loan. In this case, the lead bank in the deal (the Arranger) is then in charge of coordination between the Borrower and the Lenders. It must make available to the other Lenders all the documentation required for the due diligence process that precedes the financing.
In the context of sustainable finance, it gives them the opportunity to discuss SPTs among themselves, and more generally it enables them to formalize their final allocations.
On the Borrower's side, the main bank comes to advise him to meet the Lenders' expectations in terms of SPTs.
With, these financing structuring actions can be carried out in a single place that allows:
- the sharing of documentation (termsheet, memorandum, financing conditions...)
- The collection of responses from each stakeholder in real time
- The formalization of final allocations
3rd step: monitor compliance with sustainable performance commitments
Once financing has been granted, the credit officer or CSR coordinator takes charge of monitoring these extra-financial reporting commitments to ensure they are respected. He or she must also report any changes to the SPTs, and organize exchanges between all stakeholders in the event of a waiver or clause to provide for new KPIs or SPTs.
Kls enables the Credit Agent to give the Borrower access to a space dedicated to the ESG criteria it must provide (environmental, social and governance criteria) with the associated OTI certificates. The agent and his client are automatically alerted at each deadline to post the documents and expected results. The file manager can then check them and share them with the right people in just a few clicks.
Finally, the platform enables the Agent and Lenders to easily track the impacts on margin associated with the values of extra-financial criteria, and to properly identify ESG criteria among the totality of commitments to be checked on the same credit. Kls also offers the possibility of dedicated reporting for this type of financing.
Source: Guide to best practice for private debt financing indexed to sustainability criteria - France Invest