(Bloomberg) -- Companies that get loans with an ESG label but no immediate sustainability targets are a worrying new trend, according to BNP Paribas SA.

Agnes Gourc, the head of sustainable capital markets at the French bank, told Bloomberg News that some borrowers want the benefits of tying loans to environmental, social and governance goals without disclosing specific targets or performance metrics until a later date. 

Such “sleeping” sustainability-linked loans (SLLs) by companies including Grosvenor Group Holdings Ltd. and Raven Housing Trust Ltd have already raised concerns over exactly how they are related to social and environmental benefits, adding more fuel to a global debate about corporate greenwashing.

The stakes are high and rising as sustainability-linked debt grows in popularity. Issuers often view SLLs as an easier entry point into environmental, social and governance products than green bonds, as proceeds are not restricted only for ESG purposes. 

Bloomberg Intelligence estimated that the market for ESG debt may reach $15 trillion by 2025. BNP Paribas is a leading arranger of traditional SLL deals which posted a four-fold jump to record $490 billion in 2021.

Below are Gourc’s comments about sustainability-linked loans and other topics:

What Exactly Is a ‘Sleeping’ SLL?

This is a new type of agreement in the market which includes some elements of an SLL structure, such as potential margin adjustment, but crucially misses to define at inception what the key performance indicators (KPIs) or sustainability performance targets (SPTs) are. These are core elements of a SLL structure but they will only be agreed later in the loan agreement under this new construct. Having such intentions in the initial agreement is not sufficient to classify the instrument as an SLL, as has been confirmed by the Loan Market Association.

What Are the Risks to Such Loans?

The level of engagement with lenders may not be sufficient to set the material KPIs and ambitious SPTs during the term of the agreement, especially since changes typically require approval from a majority of lenders.

Can Transparency Be Improved?

It’s still an area of development for annual targets to be disclosed, but we believe intermediary sustainability targets included in the agreement could be shared and help drive more material impact. And borrowers should at least disclose what the KPIs are.

What Are the Borrowers’ Main Complaints About SLLs? 

It is sometimes more time-consuming than they anticipated to put an SLL in place. Being accused of greenwashing is becoming a real concern as well, and this is why relying on rigorous expertise from solid sustainability coordinators is important. Our role is to ensure a strong compliance to market standards, in particular making sure KPIs are material and targets are ambitious and well received by the market.

We have contributed to the development of the International Capital Market Association KPI Registry, a comprehensive set of reference metrics generally viewed as material for each sector, and which we expect will be used across sustainable finance instruments.

Why Aren’t the Social and Governance Parts of ESG More Popular?

Traditionally, environmental targets are science-based and therefore could be deemed easier to assess in some cases. It can sometimes be challenging to harmonize and quantify social or governance goals. They could be more relevant in some sectors, however, such as healthcare -- and there are good suggestions in the ICMA KPI Registry.

What’s the outlook for SLLs?

There’s definitely further improvements to be done. SLLs will keep evolving and growing. The vast majority of borrowers will at some point question if they can do a SLL and every sector will likely see further development of sustainability linked finance, but abiding to strong market standards remains essential.


(Adds size of the sustainability-linked loan market in paragraph five.)

©2022 Bloomberg L.P.