Socially acceptable behaviour in the loan markets – ESG in action

Unprecedented times call for unprecedented measures. The UK Government is looking to support businesses in new and innovative ways with its Covid Corporate Financing Facility (CCFF) and Coronavirus Business Interruption Loan Scheme (CBILS). These measures are very welcome and could be the start of cementing environmental, social and governance (ESG) factors at the forefront of decision-making in the financial markets.

ESG considerations have been a “hot topic” of late, pushing their way into the limelight as a result of a growing recognition of the financial risk climate change poses and the desire to move towards a more sustainably-led financial system. Increasingly, that "push” is coming from all directions with investors, central banks and regulators all joining the call to arms, but many participants have yet to make the jump to introduce an ESG-filter into daily decision-making.

That could all now change. The CCFF and CBILS are innovative examples of the UK Government working with loan market participants to provide funding for a common social purpose - to facilitate liquidity in the market, to keep businesses afloat and to keep employees in jobs. We are also seeing lenders and private equity firms exercising ESG practices by shifting how they approach their investments and portfolios. Even before the latest letter from the Prudential Regulation Authority (PRA) (encouraging lenders to waive financial covenant breaches if they have arisen as a result of Covid-19), we have seen lenders and private equity firms coming together to support businesses in a challenging environment. This includes lenders granting 12 month covenant waivers and agreeing to provide short term accordion facilities, and private equity firms injecting more cash into their portfolio companies. All of this is with the common aim of keeping good and strong businesses going. The “social” limb of ESG is usually the hardest to quantify, but this is it in action.

Without the current need for liquidity in the markets, many of these conversations would not be happening. Whilst there are no doubt further challenges ahead that all of us will face across all aspects of society, recent events have caused lenders, borrowers and their private equity backers to come together and take a longer term look at their business and investments. Underlying attitudes of investors, central banks and regulators to ESG have not changed and, if anything, will intensify. Firmly embedding ESG considerations into the loan markets will require all participants to work together towards a common purpose - this could just be the start.