Innovation and integrating new trends in financial products can sometimes lead to a paradox. Discussing the ESG conditions of a sustainability linked loan we came to discuss the bonus/malus margin correction when our client would meet its 2030 ambitions ESG KPIs.
We came to the conclusion that these conditions could be considered as a good incentive to be more sustainable for our client, but surely not for the banks. If our client would not meet the KPIs in ESG the bank will earn an additional margin! This could incentivize banks to push for unrealistic targets or to offer this option to clients that are not really motivated to improve their processes. That cannot be the way policy makers intend ESG incentives to work.
A solution being discussed in LMA forums to that is: When a client does not meet its ESG standards, the bank will need to make a reservation of the malus revenues and will mandatorily invest these malus revenues in practical ESG investments (article 9 funds or philanthropic projects, preferably initiated by the client itself).
Maybe only a side topic in a full legal framework of a club deal or syndication, but at least a way to enhance all parties responsibility in actually committing to contribute to a net zero world.
