Insights from LSEG Data on Sustainability Strategies

Iolanda Barbati EMEA Contributor Relations Manager – Loans, LSEG Data & Analytics

Maria Christina Dikeos Head of Global Loans Contributions, LSEG LPC

Analysis of syndicated loans market in the context of sustainable finance constructs has significantly evolved from the methodology or considerations applied only a few short years ago.

At the outset, as sustainable loan assets ramped up, analytical focus was on the quantity of deals rather than their quality, due to the novelty of the product, which needed to lay its foundations through an initial phase of “experimentation on the field”.

Since 2017, however, at a global level, discussions around sustainable lending among key market players have contributed to tighter criteria, meaningful aspirational performance metrics and greater transparency, all of which favor the quality of sustainable loan constructs over the quantity or size of deals. The following analysis builds on this foundation and explores data and feedback from those directly involved in the sustainable finance market.

The pipeline of global sustainable finance loans has come off highs observed during the Covid pandemic and in the two years immediately thereafter to top US$712bn by 2022. What we have seen in the first nine months of 2024 is that ESG declined, as a proportion of global issuance, from 21% and 19% of 2022 and 2023 respectively, to 16%.

Nevertheless, in 2024, the market remains steady. When looking at volume on a global level, sustainable syndicated loan increased by approximately 26% in the first nine months of 2024, reaching $580 billion compared to $459 billion during the same period last year.

This uptick is significant given the increased scrutiny over potential 'greenwashing' risks, along with various factors that impacted broader issuance, including economic headwinds, high interest rates, geopolitical tensions, and ongoing conflicts, particularly in Ukraine. Additionally, there was uncertainty surrounding the U.S. presidential election as well as concerns around potential escalation of military tension in the Middle East which risked slowing the forward calendar.

Source: LSEG LPC

Against this backdrop there has nevertheless been heightened focus on enhanced verification processes for sustainability-linked loans (SLLs), which aim to boost the credibility and effectiveness of the performance targets set by borrowers.

Regulatory bodies and key market players are expected to provide new guidelines to support the growth and integrity of these financial products.

Despite the challenges, SLLs account for 70% of the total global sustainable finance loan volume, with an issuance of $407 billion, an increase of 21% compared to the first nine months of 2023, but a 13% and 3% decrease comparing to the first nine months of 2022 and 2021 respectively.

Source: LSEG LPC

Regional Trends in Sustainable Finance

Regionally, the sustainable finance market in the syndicated loans space is experiencing diverse trends.

Asia-Pacific (APAC): The region is working to catch up on sustainable finance policies, facing the challenge of implementing green loan principles in high-emission sectors. Japan, for instance, is exploring transition bonds as a means to finance decarbonization in environmentally impactful sectors.

In US, the market has shown some degree of resiliency despite divided ESG viewpoints and concerns about disruptions and/or deprioritization in the wake of the new Republican administration following the US elections. The US is likely to pull out of the Paris Agreement again after withdrawing in 2017 when Trump won his first term.

In the wider context of drive collective and inclusive climate action on a global scale a key role is played by Cop29, the UN’s annual climate conference. Held from November 11–22 in Baku, Azerbaijan, the conference delivered agreements to triple climate finance for developing countries, with a target of $300 billion annually by 2035 and a broader aim to mobilize $1.3 trillion from public and private sources. This funding is intended to support vulnerable nations in adapting to climate impacts and transitioning to greener economies. Rules for carbon trading under Article 6 of the Paris Agreement were also finalized, enabling countries to trade carbon credits with strong safeguards for environmental integrity and Indigenous rights.

Source: LSEG LPC

Moving to Europe, the Middle East, and Africa (EMEA), we can see that the market continues to lead in the issuance of green loans and SLLs, supported by strong regulatory frameworks and increasing corporate commitments to net-zero targets. The Region recorded $251 billion for the first nine months of the year, 18% higher than the same time last year. Sustainability linked loans led issuance across market segments, with $193 billion, 24% higher than the first nine months of 2023, but 2% and 13% down when comparing to the same time during 2020 to 2022 respectively.

In the EMEA market, when compared to the previous year, there is a key distinction for 2024 to take into consideration. “It’s a very particular time in the market, as we’re observing distinct trends driven largely by sector-specific dynamics. In Europe, these trends vary depending on the sector and business type of the corporates or borrowers. One key observation is the differentiation between large corporates and smaller companies. The market landscape now presents a combination of sector- and size-dependent trends that were not apparent last year. Previously, the sustainability-linked loan market applied uniformly across all company sizes and sectors. This year, however, we are seeing a marked shift with clear distinctions being made. Looking ahead, while we observe a slowdown in market volumes for sustainability-linked RCFs, certain sectors and companies remain highly committed to best practices. These frontrunners are enhancing their KPIs and maintaining ambitious commitments to stakeholders. Although market volumes may decline, we anticipate a potential rise in quality, as dedicated corporates push forward with more robust and innovative sustainability practices. Additionally, the small- and medium-sized enterprise segment continues to grow rapidly, reflecting strong underlying dynamism even if less visible in terms of overall volume”, explained Pascale Forde-Maurice – Head of European Corporate Sustainable Banking at Credit Agricole CIB.

In discussion with key market players, it also emerged that 2024 is also shaping up to be a pivotal year.

“This is partly due to the significant volume of refinancing for inaugural sustainability-linked revolving credit facilities (RCFs). These refinancings add another layer of complexity to market analysis, as we are not only examining new entrants but also assessing the behaviour of corporates during this refinancing phase. This dynamic is reflected in statistics, as well as in lender reactions to borrowers who choose to remove sustainability features from their strategies. Such decisions require enhanced communication and reassurance to lenders, who seek clarity on the rationale behind these changes”,

mentioned Lucie Campos Caresmel – Head of EMEA corporate, commodities and export finance distribution at Credit Agricole CIB.

In this regard, it is interesting to mention that she raised a question to the audience of the ESG panel at the LMA’s inaugural European Annual Conference in Paris on 23rd October 2024: “what might be at stake with the hypothetical removal of a SLL feature? Interestingly, 30% of respondents said that the ESG communication of the Borrower likely did not need the support of the SLL product anymore, 25% responded that they might think that the incentive was insufficient, 20% said that the sourcing of the data had likely turned out to be impractical. The remainder 25% of respondents quoted the fact that the structuring of proper SLL features needed time, that the borrower might have a reputational issue looming on the horizon, or that the calibration of the KPI targets had been too ambitious.”

In this context, across the EMEA market, the development of new loan types could help increase confidence among investors and borrowers. Indeed, there is a growing interest in transition loans and innovative loan types, such as blue loans and Islamic green finance initiatives, that we have seen growing in the last few years. The “Transition Loan Principles” can set up a consistent assist to navigate the challenges of this principal market. The Loan Market Association, along with the Asia Pacific Loan Market Association (ICMA) is developing these sets of principles, which are expected to go under revision till February 2025.

In reference to innovative type “blue loans, while less widespread, have seen some interesting applications, particularly among water utilities. These transactions offer unique metrics, such as cubic feet of water managed, which broaden the scope of environmental impact indicators and appeal to lenders and investors”, an EMEA lender mentioned.

Historically, in the loans sustainable finance space, across the ESG acronym, the attention has been on the E, and the blue loans offers a new perspective to look at this, but how about the S, which seems to have been left a bit aside across the years? “The “S” (social) aspect of ESG remains underexplored compared to the environmental pillar. Social loans often focus on standardized areas like social housing, healthcare, and education. However, the inclusion of social KPIs in sustainability-linked loans presents opportunities for innovation. The Corporate Sustainability Reporting Directive (CSRD) is expected to drive companies to disclose more advanced social indicators, particularly in Europe. This could expand the range of social KPIs, fostering further development in this area”, mentioned Pascale Forde-Maurice – Head of European Corporate Sustainable Banking at Credit Agricole CIB.

Lastly, in this excursus across Regions, the Middle East is emerging as a significant player in the sustainable syndicated loan market, driven by strategic regional ambitions, such as Saudi Arabia’s Vision 2030 and the UAE’s Net Zero 2050 strategy, along with growing interest from global investors in the region’s green financing initiatives.

Looking Forward

Stricter regulations and a diverse range of loan products could foster growth as companies strive to meet ESG requirements, particularly in EMEA. Factors such as improved transparency, stricter regulatory frameworks, and increasing investor demand for ESG-aligned investments are expected to drive future growth.

In summary, while the sector faces headwinds, emerging innovations and increased regulatory guidance could keep alive the interest for the sustainable syndicated loans product, particularly during this time where the market is at a crossroads, with shifts in both scale and focus.

Post Scriptum

The data presented in this article is reflective of news stories, press releases and lenders activities across the sustainable finance sector. If you wish to contribute for league tables purposes, please send transactions info to emea.loans@lseg.com.

For analytics and league tables queries Iolanda.barbati@lseg.com paulina.tabaczynska@lseg.com