11 September 2023

The role of databases in the sustainable loan market

Environmental Finance (EF) Data has been covering the sustainable loans market since its inception. Ben Smith outlines how the database has evolved in line with data challenges and market growth opportunities.

Environmental Finance: How has data coverage evolved to keep track of the growing sustainable loan market?

Ben SmithBen Smith: Our data coverage of the sustainable loan market has grown alongside the development of the market. When we first started covering loans in 2020, volumes were relatively small, and scant information available.

Since then, we have seen the market take off, with much higher volumes, greater diversity of borrowers and lenders in terms of company, sector, and region, and more material and ambitious sustainability-linked loans (SLL) KPIs. Our data coverage of loans has expanded to capture as much granularity as possible, including use of proceeds and SLL KPIs, lender roles, affiliated documentation, Science Based Targets initiative (SBTi) alignment, KPI verifiers, and principal alignment.

There are still many challenges surrounding data availability and transparency, especially when compared with the sustainable bond market, however we are seeing improvements in this area as both borrowers and lenders become more comfortable with the instruments.

EF: What are the biggest challenges in capturing sustainable loan data?

BS: Data availability is by far the greatest challenge facing sustainable loan databases.

Data privacy regulations and limited reporting requirements create a general lack of transparency in the loan market which makes estimating the total market size and data coverage challenging.

The marketing advantages of sustainable loans create some impetus for the publication of private deal information, but the sources and granularity can be challenging to verify. Even when we have the minimum data required to add a loan to the database, there are still frequently gaps in the data provided e.g., the use of proceeds or KPI or the identity of the lenders, which makes accurate market summaries and prorated attribution of volumes to lenders more difficult.

A lack of standardisation in the makeup and structure of loans and in the data provided creates problems for comprehensive coverage of granular data points such as use of proceeds, KPI, or lender roles.

EF: What role can databases play in the sustainable loan market?

BS: Data providers can help bring transparency to the opaque loans market and allow for comparison and market building of specific sectors, regions, or borrower types. By creating a hub for disparate sustainable loan transactions, databases can allow lenders, prospective borrowers, and regulatory bodies to better understand the market structure.

Through partnering with leading lenders to reconcile data and maximise market coverage, databases can also centralise and track the market practices and evolutions. By requesting specific data points from all lenders, databases can potentially, in a small way, contribute to the standardisation of certain elements of the sustainable loan market.

EF: How are you capturing SLL KPIs? What can KPIs tell us about SLLs and industry trends?

BS: The company-specific nature of SLL KPIs can make comparison and market mapping difficult, so we created a set of broad KPI categories to give a macro-level view of the type of KPIs and targets being set in the SLL structure.

We still record the specific details of each KPI as a note, but the categorisation allows for top-level country, region, sector, borrower and year-on-year analysis of KPIs.

Carbon emission-based KPIs are by far the most frequent and we split the carbon emission KPI category into absolute and reduction targets and by Scope 1, 2, and 3. This level of granularity has allowed us to quantify the transition we are seeing towards the addition of Scope 3 emission KPIs in SLLs. When compared with sustainability-linked bonds (SLBs), SLLs tend to have more KPIs per deal, a greater diversity of KPIs, and more KPIs focussed on social targets. There has been progress away from ESG assessment-based KPIs towards more material, sector-specific KPIs for SLLs with the addition of external verifiers and the input of the SBTi in setting targets. We are working on incorporating ex-post KPI information and tracking the hitting or missing of SLL KPIs. However, data availability is currently poor and there is still some negative stigma in the market around missing targets, meaning such events often go unreported or are not publicised.

EF: What can the data tell us about the interaction between the sustainability-linked and use-of-proceed structured sustainable loans?

BS: Whilst the sustainable loan market is dominated by SLLs (83% by value), use-of-proceeds loans (green, social, and sustainability) continue to grow in volume and absolute numbers year-on-year.

Green continues to dominate the use-of-proceeds sustainable loans (89% by value) and green loan borrowing showed resilience amid challenging, high-interest and inflationary conditions in 2022. Use-of-proceed borrowing is particularly strong in the US, where sustainability-linked structures are under significant scrutiny.

We are seeing an interesting emergence of hybrid loan structures which incorporate a use-of-proceeds loan tranche (commonly a term loan) with a sustainability-linked tranche (commonly a credit facility). Since 2017 we have tracked 20 of these hybrid loans, worth over $8 billion.

EF: What is next for sustainable loan data?

BS: Sustainable loan data has progressed significantly in recent years but still lacks the standardisation and availability seen in the sustainable bond market. There is a lot of potential and opportunity for greater standardisation and data communication.

There are positive moves towards standardisation from associations and associated instrument principles. The Green Loan and Sustainability-linked Loan Principles from the Loan Market Association (LMA), Loan Syndications and Trading Association (LSTA), and Asia Pacific Loan Market Association (APLMA) were all updated in 2023 to be more prescriptive. In addition, ICMA's KPI registry now recommends sector- specific, material KPIs for sustainability-linked finance.

Our first priority as a database is to maintain and improve our market coverage by partnering with more lenders to ensure we are capturing their publicly available sustainable loan activity as accurately as possible.

We are also focussed on bringing increased granularity to our sustainable loan data, with projects in the pipeline to include more information of SLL KPI target dates and step-up/down mechanisms, track the various lender roles more closely, improve the gathering of impact reports and ex-post impact and allocation data for use of proceed based loans and track the refinancing of loans to avoid double counting.

Ben Smith is data strategist at Environmental Finance Data.

For more information, please visit www.efdata.org

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