The green agenda is currently dominating headlines. The UK has put the world’s most ambitious climate-change targets into law committing to reduce carbon emissions by 100 per cent by 2050. Higher education (HE) establishments will play a pivotal role in meeting these ambitious targets in a number of ways, including through their teaching and academic research and, perhaps slightly less obviously, through the ways in which they look to raise (and utilise) debt. Embracing an effective environmental, social and governance (ESG) framework has the potential to open up a host of benefits for HE establishments, including attracting students who are passionate about ESG concerns, thereby improving the environment and re-energising local communities, profile raising and, potentially, borrowing at a more favourable rate. This article will look at the two main types of green and sustainable loan products on offer and discuss the risks of greenwashing.
Types of loans
The loan markets have sought to support their own ESG goals and those of their customers through the development of two key lending products: green loans and sustainability-linked loans.
Green Loans (GLs)
GLs are loans made available exclusively to finance or refinance, in whole or in part, green projects with clear environmental benefits. For example, the building of zero emission buildings or the installation of solar panels. Lenders will often offer preferential rates to borrowers of GLs. GLs will be of particular relevance to HE establishments which often have large property portfolios – borrowers will be able to increase their energy efficiency and reduce their carbon footprint (which should, in turn, reduce energy bills) while taking advantage of a lower rate of interest.
Sustainability linked loans (SLLs)
SLLs are loans which incentivise borrowers to improve their sustainability profile over the term of the loan by achieving pre-agreed, ambitious sustainability performance targets (SPTs). The use of loan proceeds for green projects is not a requirement/determinant for a SLL. SPTs can be environmental or non-environmental and can include, for example, a reduction in greenhouse gas emissions and energy consumption, water quality targets the payment of the London living wage to all staff and contractors and the reduction of internal food waste. Often, but not always, SLLs will contain more than one SPT. Lenders will be keen for SPTs to be monitored regularly, ideally by an external third party who has specific expertise in the relevant field to ensure results are accurate and objective. Borrowers will typically be charged a lower margin if they meet or exceed their SPTs. There is generally no drawstop or event of default triggered by a borrower’s non-compliance with its SPTs, the charging of a higher margin is typically the only penalty faced by a borrower.
The development and growth of SLLs has opened up the world of ESG financings to borrowers across different industries and not just those involved in environmentally focused or solely green projects. Several HE establishments have recently entered this space and have taken the opportunity to dovetail their financing needs with their ESG goals. For example, the University of Gloucestershire secured a £29m SLL from Barclays in 2022 in order to fund its City Campus development and support its ESG goals of recruiting a higher proportion of UK-domiciled BAME students which will broaden access and engagement for students from deprived areas and reduce its gas and electricity CO2 emissions.
Other recent high-profile SLLs to HE borrowers include King’s College London, which worked with NatWest to raise sustainable debt through a mix of debt instruments (eg bonds, loans and private placements) and the University of Essex, who has received funding from Santander to maintain its transformational capital investment programme and move forward with its sustainability journey. Unite Students, the UK’s leading owner, manager and developer of student accommodation announced in 2021 that it entered into a £450m SLL with a syndicate of retail banks in order to support its sustainability strategy. Dependent on performance against its SPTs, there will be a 2.5bps premium or reduction to Unite’s base margin, and Unite would seek to allocate any margin savings to social initiatives which benefit young people and the communities in which it operates.
Whilst the benefits of obtaining green / sustainable financing vastly outweigh the negatives, it is worth being aware of the potential pitfalls, the main one being greenwashing. Greenwashing is where an organisation purports to be environmentally conscious for marketing purposes but, in reality, is not making any notable sustainability efforts. First coined in the 1980s, the term has been the subject of numerous headlines over the past few years. It is important to note that greenwashing can also happen inadvertently, for example, where proper due diligence of third-party supply chains have not been undertaken. Organisations making false or misleading claims about their green credentials can find themselves subject to costly legal action from consumer-rights organisations or other groups and dealing with extensive reputational damage.
Awareness of ESG issues has grown rapidly in recent years, accompanied by heightened scrutiny from regulators, donors, students and the broader community on how ESG risks are managed. By embracing the green agenda and taking advantage of the green and sustainable loan products on offer, HE establishments can become market leaders in the drive to create a more sustainable world whilst taking advantage of the financial benefits on offer.
How can we help?
The Banking and Financial Services team at Farrer & Co regularly act for HE establishments in relation to their financing matters and are familiar with the financing documentation that a HE establishment would need if considering any sustainable finance options either via a GL or a SLL (or a private placement). If you have any questions regarding sustainable finance or any of the loan products discussed above, we are experienced in these matters and can offer practical and sensible advice.
If you require further information about anything covered in this briefing, please contact Caroline Tatham or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, August 2022