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ESG Loan Financing – Key Observations and Trends to Watch for in 2023

Throughout 2022, the environmental, social, and governance (“ESG”) linked loan financing markets in the United Kingdom and the European Union continued to vigorously expand and evolve. The UK and European-centered Loan Market Association (the “LMA”) remains closely involved in advancing market conceptions of ESG bank lending, and is shouldering the strategic charge of producing – in due course and in conjunction with lenders – market-standard ESG loan documentation, to be accompanied by related guidance and training.

This article discusses key observations and trends regarding ESG lending in the UK and EU during 2022 and Q1 2023. Please contact Robert Richardson, Sonia Struthers, or Ashwin Sathyamoorthy if you have any questions regarding ESG-linked lending.

The Changing Landscape

In recent years, changes in the legislative landscape have moved individuals and businesses to adopt more “ESG-friendly” behaviour. One of the main drivers for recent increases in ESG loan activity is a strengthened public conscience towards ESG concerns, and a desire for organizations to present themselves as being aligned with such concerns. On one hand, many lenders are looking to show industry leadership in terms of advancing sustainable finance, while borrowers are responding to ever-increasing levers of stakeholder accountability. ESG loans are part and parcel of achieving these goals for both parties.

While the ESG-linked financing market is seemingly more developed in Europe than in Canada and North America generally, Canadian lenders and borrowers may wish to observe these trends as a sign of potential things to come, and to consider the associated risks and opportunities.

Key Observations and Trends in ESG Lending

  1. A great majority of the corporate loans in the UK and EU during 2022 included an ESG element: The ESG loan market continues to grow rapidly, and the expectation is that this upward trend will persist. Approximately 70% of new corporate loans in 2022 incorporated an ESG-linked component in some capacity.
  2. Very few of these ESG-linked loans were “green loans": Green loans are loans which require the borrower to use loan proceeds exclusively to finance (or refinance) for specified ESG purposes. For example, a business may secure a green loan specifically to acquire and fit solar panels on its facilities. As companies have varied expenses which do not necessarily qualify as an ESG purpose, the absence of a robust market demand for purely green loans (as opposed to sustainable loans) is understandable.
  3. The vast majority of ESG-linked loans in 2022 were “sustainable” loans: Sustainable loans are loans which permit the borrower to use loan proceeds for whatever purposes the lender and borrower agree to. However, the sustainable loan’s interest rate will decrease or increase contingent on whether or not the borrower satisfies certain negotiated ESG criteria or targets. Some examples of negotiated ESG targets include achieving a certain percentage of women or more broadly diverse individuals in senior management or board positions, or reducing greenhouse emissions by particular amounts within certain timeframes.
  4. Sustainable loans are characterized by three key features:
  • Nature of ESG targets: ESG targets for sustainable loans should be meaningful and measurable. Draft guidance from the LMA states that ESG-linked targets in sustainable loan agreements should be set “ambitiously”.[1]
  • The quantum of interest rate fluctuations will depend on whether or not ESG targets are achieved: The amount by which interest rates are affected in sustainable loans is directly linked to how closely the borrower adheres to negotiated ESG targets. However, at this time, the realized financial consequences of meeting or failing to achieve the negotiated ESG targets are not typically significant. For example, we are aware of variances in interest rates of 15 basis points.
  • The consequence of a failure to meet ESG targets is not ordinarily an event of default: Failing to meet ESG targets is, thus far, not typically considered to be an event of default in sustainable loan agreements. Rather, failing to meet ESG-related targets has been a factor that increases a loan’s interest rate.
  1. Standardized templates for ESG-linked loans reflecting market consensus have not yet been developed: The LMA is currently working to develop template documentation for ESG-linked loans that incorporate market participant feedback. These templates are anticipated to be released in the summer of 2023. However, the LMA cautioned that the templates may not reflect ongoings in the market if the ESG loan market practice fails to develop consensus by then.
  2. Concerns regarding transparency in ESG-linked loans:
  • Absence of systems to measure and compare ESG loans: The ESG loan market’s recent emergence has meant that there are absences of transparency as the market has not yet developed, or is still in the process of developing and refining, standardized systems or practices for measuring considerations such as:
    • how sustainable or ESG-linked a particular loan is in fact;
    • how “green” one loan to a particular borrower is relative to one made to another borrower;
    • how “green” a bank’s portfolio is relative to another bank’s; or
    • how “green” a loan is, if the robustness of the borrower’s current ESG activity leaves little room for further improvement.

However, market participants and the LMA recognize that there is a pressing need to resolve these transparency issues, and create suitable and acceptable measurement systems for ESG loans.

  • Greenwashing: The concept of “greenwashing” has come into increasing focus as a corollary to growing public demand for ESG-related efforts across all industries. In the context of ESG-linked lending, greenwashing occurs when banks, loans or borrowers deceptively market their policies and initiatives to appear more ESG-compliant in the public eye, while their actual impact on ESG matters is insignificant. By developing standards for transparency and measurement of ESG loans, these concerns for greenwashing should be reduced.

Key Takeaways

ESG was a driver in 2022 and Q1 2023 for developments in the financing markets on both sides of the Atlantic. If this trend is any indication, the rest of 2023 should also be quite active in this regard. Market participants should continue to watch for regulatory developments and the progression of market consensus formation with respect to ESG.

We are here to help

McCarthy Tétrault has a multidisciplinary ESG and Sustainability team that is equipped to provide clients with a full suite of advice and support to assist them in integrating ESG thinking into their organizational DNA. With a robust understanding of business, industry, and market drivers, we are well-suited to provide contextualized guidance. Please contact Robert Richardson, Sonia Struthers, or any of the authors of this article if you have any questions regarding ESG-linked lending.


[1] APLMA, LMA and LSTA, "Guidance on Sustainability-Linked Loan Principles" (2023) at 5, online (pdf): <>