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Out-Law Analysis | 21 Nov 2022 | 2:24 pm | 4 min. read
Universities and higher education providers are well-placed to adopt sustainable financing solutions, but should beware of growing scrutiny over ‘greenwashing’, experts have said.
Lenders and investors are coming under increasing regulatory pressures to channel their support to projects and organisations that pursue environmental, social or corporate governance (ESG) objectives. Alexis Hayworth of Pinsent Masons and Graeme Aithie of QMPF said that agenda aligns with initiatives higher education providers are already pursuing and they highlighted examples where this has already helped some providers to gain access to debt and capital.
Alexis Hayworth said: “Sustainability is a hot topic across the financing world. It makes sense that the higher education sector is leading the way with adopting sustainable financing products given their innovative approach to raising or protecting money and the activism levels of their students.”
Sustainable finance comes in two forms for both bonds and loans.
One option for universities is to pursue so-called ‘use of proceeds’ products, where finance provided to the higher education provider by investors or lenders is for specified green or sustainable projects. These are known as “sustainability bonds” or “sustainability loans”. Alexis Hayworth of Pinsent Masons said: “Financing through sustainability bonds is similar to conventional bonds. All the terms and conditions, including the return, are the same, and there is no difference in the credit risk profile. The key difference with a sustainability bond is that the issuer commits to using the proceeds of the bonds for a green and social purpose.”
Student accommodation expert Chris Owens of Pinsent Masons said: “With many higher education providers currently facing a shortage of student accommodation, and with this only set to get worse as we head towards 2030, sustainability bonds or loans may provide an interesting new option to providers looking to raise funds to replace older stock with new energy efficient accommodation as part of their wider net zero ambitions.”
Another sustainability-linked financing option for higher education providers is to seek finance that is linked to green or sustainable outcomes for the whole organisation, rather than a specific project. These are known as “sustainability-linked bonds” or “sustainability-linked loans”. Here, it is common for specific ESG outcomes to be agreed and for key performance indicators to be set which are linked to targets and milestones, so that the higher education provider’s performance against the outcomes can be measured. There is usually a step-up in the rate of interest if targets are not met. In the higher education space, sustainability bonds have been more typical in the bond market and sustainability-linked loans have been widely used in the loan market.
Pinsent Masons advised King’s College London on the first ‘use of proceeds’ deal for a higher education provider in the UK, a sustainability bond private placement. Pinsent Masons has also advised London School of Economics and Political Science (LSE) on a sustainability bond private placement, which the higher education provider will use to invest in the construction of a new ‘net zero’ carbon building. The terms of the financing are governed by a sustainable finance framework that has been accredited by an independent third party as aligning with green, social and sustainable bond and loan principles.
Alexis Hayworth of Pinsent Masons said: “Various bodies including the Loan Market Association, the International Capital Market Association and the Loan Syndications and Trading Association have issued green, social, sustainable and sustainability-linked principles for markets to adopt. There is no definitive standard within national markets and no global recognised standard for green or sustainability-linked financing, however.”
Graeme Aithie of QMPF said most capital market activity by UK universities, aside from refinancings, in the last 18 months has followed either a green or sustainable financing framework.
“We expect this trend to continue, given the natural alignment of this form of borrowing with higher education provider’s strategic goals and as universities are increasingly embedding ‘net zero’ and energy transition projects within their capital expenditure plans,” Aithie said. “Sustainable financing approaches allow a university to make a clear public commitment towards these ESG-related goals, which are an increasingly high-profile factor for stakeholders and students.”
“Sustainable finance principles can be supported by a relatively wide range of project types, which typically map well against most estate investment plans. Universities initially need to consider which of its capital projects are potentially eligible for ‘green’ or ‘social’ objectives in assessing whether the ‘use of proceeds’ approach is suitable, although we generally find that the majority can be eligible, particularly under the ‘green’ objectives. A wider commercial assessment is also required, which considers whether third party-sources of finance or grants may be available for certain projects, before deciding to fund with ‘core’ on-balance sheet borrowing,” he said.
Pinsent Masons has also advised University College London on a £300m sustainability bond, which was the first public listed sustainability bond in the sector, and University of London on their £50m sustainability-linked loan agreement.
Sustainability-linked loans can refer to any types of debt or loan facilities, and even guarantees or contingent credit lines, which incentivise the borrower’s progress towards sustainability-focused objectives. The borrower’s sustainability performance is measured using sustainability performance targets (SPTs). SPTs are predefined tests, which are normally based on objective metrics or external ratings to capture improvements in the borrower’s sustainability profile.
Sustainability-linked loans will not normally restrict use of proceeds and can therefore be used for general corporate purposes. The borrower’s performance against the SPTs will lead to margin redetermination over the life of the instrument.
Aithie said sustainability-linked lending is most common in the context of shorter-dated borrowing. He said this reflects the challenge of developing performance targets which could apply over the lifetime of a private placement – typically 15 to 50 years.
In the UK, regulator the Financial Conduct Authority (FCA) recently set out its plans to establish a detailed labelling, disclosure and naming and marketing regime regarding sustainability-related products in financial markets for asset managers and investment distributors. The move reflects its concerns over ‘greenwashing’.
Jane Boyd of Pinsent Masons said: “Whilst sustainability financing products are on the rise, so is the criticism surrounding greenwashing, whereby a product is marketed to make it appear more ‘green’ than it actually is. There are two potential areas of risk in terms of greenwashing for an organisation operating in the financial services sector. First, regulatory enforcement and sanctions, and secondly, investor-based litigation.”
“Greenwashing is an area of focus for the FCA and may well also lead to civil claims, such as for mis-selling of financial products. However, one challenge in relation to greenwashing is the absence of universal rules on when a product can be described as ‘green’. It is therefore crucial that higher education providers carefully scrutinise their plans and engage appropriate experts to help advise them,” Boyd said.
Co-written by Katy McBride of Pinsent Masons.
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