One of the main challenges for the impact loan market is the lack of pre-defined regulation to assess company proposals – each bank following its own standards.
To solve this issue, LMA (Loan Market Association, which aims to promote the development of the secondary loan market in Europe) and ELFA (European Leveraged Finance Association, a professional association of investors active in the European leveraged finance market) have defined recommendations for the implementation of these loans according to five criteria: the choice of key performance indicators (KPIs), the adjustment of sustainability performance targets (SPTs), the definition of the loan’s characteristics, the transparency on the performance achieved (reporting) and external verification for the confirmation of goals.
These principles are also stated in order to avoid greenwashing. Although, as they have no legal influence, they do not prevent some companies from practicing greenwashing while benefiting from these loans. Luis Reyes adds that “existing recommendations and good practice guides don’t have any legal value. There is no proper legislation that would compel businesses to really engage in positive environmental or social change.”
The lack of regulation in terms of transparency would indeed allow some companies to state ESG goals without really meeting them while making profit out of the attractive rates of positive impact loans. For now, in order to be eligible for this kind of loan, the defined objectives must simply be “ambitious enough”, which can allow some companies to achieve easy proposals that have no real impact. “The main problem with positive impact loans is that there is no traceability as to how the money was spent. However, the companies can use the money in activities that go against the goals of the Paris Agreement”, our expert concludes.