Preview
Increased regulation and investor demand are driving change in the direct lending market’s approach to environmental, social, and governance (ESG) factors and sustainability. In addition, lenders are exploring how their sphere of influence in the investment space can be used to actively contribute to positive change. Lenders like Alcentra are integrating ESG into their investment universe primarily through sustainable finance, and the provision of sustainability-linked loans.
In 2022, 50% of European leveraged loans included sustainability-linked features—continuing the upward trajectory from 44% in 2021.1 While the geopolitical landscape and challenging macroeconomic backdrop in 2023 led to a slowdown in primary issuance, ESG remains at the forefront of developments in the European leveraged loan market.
This whitepaper will provide insight into the key features of sustainability-linked loans (SLL) and will use both market data and case studies to explain how the SLL market has evolved. We look at:
- What are sustainability-linked loans?
- A growth story for SLLs.
- Selecting KPIs and calibrating targets.
- SLL characteristics.
- SLL reporting and verification.
- Best-practice using an example case study.
We believe companies should take a proactive approach in shaping the (SLL) market by applying best practice and experience in helping borrowers and investors understand how to effectively structure SLLs.
Endnote
- Source: Reorg Research, Inc., as of November 30, 2023.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. Diversification does not guarantee a profit or protect against a loss.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price. Past performance does not guarantee future results.