By: Luis Gerardo Ramírez Villela
Environmental, Social and Governance (ESG) standards help shareholders and stockholders for risk management purposes but also to identify opportunities in connection with environmental, social and governance criteria to be applied within a corporation.
In this respect, and for purposes of banking and finance, it is important to consider that to obtain a loan in this new era, corporations must maintain sustainability principles aligning with new criteria that are being used for such purposes worldwide.
It should be noted that sustainability-linked loans are designed for corporations to comply with ESG standards and reach specific targets through pricing incentives.
Pursuant to the Sustainability-Linked Loans Principles published by the Loan Syndications and Trading Association, sustainability-linked loans are “any types of loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) for which the economic characteristics can vary depending on whether the borrower achieves ambitious, material and quantifiable predetermined sustainability performance objective”.
Keep in mind that this type of loan is like revolving loans with the difference being the type of interest paid by the borrower since such interests would be linked to sustainability key performance indicators and therefore, it will depend on how successful the corporation is with complying with its sustainability targets to determine the interest rate that would apply.
Although requirements continue to be the same for obtaining financing, corporations must focus on having an ESG strategy and comply with the three pillars of corporate sustainability: (i) environmental pillar, (ii) social pillar, and (iii) economic pillar.
From a legal perspective and considering these three pillars, the best strategy would involve not only the creation of internal codes, manuals and regulations but also performing periodic due diligence processes to verify from a compliance perspective that business is being carried out in due course and that a sustainable-linked loan may be applied for.
It should be noted that these types of loans typically applied for by the following industrial sectors: (i) chemicals, (ii) utilities, (iii) hospitality, (iv) education, and (v) housing, amongst others.
In Mexico, this type of loans has been recently granted by international corporations to real estate investment trusts and are also being used by specific corporations in the capital markets through the launching og sustainability-linked long-term notes.
