The growth of the ESG financing market has been nothing less than extraordinary. Just two or three years ago, it was mainly perceived as a niche market for large industrial corporates looking to finance projects with an environmental angle. Today, it is one of the first topics of conversation in most financing discussions with a wide range of lenders and borrowers.
According to the FT, the total assets in sustainable funds was almost US$1.7tn at the end of 2020, up 50 percent over the year (“ESG funds defy havoc to ratchet huge inflows”, Financial Times, 6 February 2021). Similarly, research from Morningstar shows that ESG funds in Europe attracted net inflows of €151 billion between January and October 2020, up almost 78 percent on the same period in 2019 (“EU rules promise to reshape opaque world of sustainable investment”, Financial Times, 17 January 2021).
So, what exactly is ESG financing and what is behind its exponential growth?
The terminology can certainly be confusing. Green financing, green bonds, sustainability-linked loans, social and ethical finance – there are almost as many terms for ESG financing as there are solutions. But as Marc Finer, ESG finance specialist and a director in KPMG’s Debt Advisory Group, explains, “these days ESG finance is seen as an umbrella term that captures a diverse range of debt finance products and solutions, for organisations of all sizes, applicable in a wide spectrum of situations.”
On the lending side, banks, private and public capital markets, investors and credit funds are all increasingly active in the ESG financing space. On the borrowing side, demand is rising from listed and privately-owned corporates through to private equity-backed businesses, in both the large-cap and mid-market space. Nor is it confined to typical ESG sectors like utilities, oil and gas or mining. Contemporary ESG solutions can cover businesses of all types, in all sectors.
“If you’d have asked me 18 months ago, I would have said that our work in this area was occasional, focused among large, industrial corporates, and with ESG rarely being a key driver of the company’s refinancing strategy or the credit market’s appetite. But today, nearly every conversation we have with our clients across every sector – and with all types of lenders - involves a discussion about ESG,” says Marc.