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ESG and access to capital: the travel industry needs to stay alert
Sustainable finance is not currently the hot topic that it was a couple of years ago. Challenging economic conditions have led firms to prioritise other issues, and there have been concerns around greenwashing.
But firms in the travel industry should not be lulled into a false sense of security. The forces driven by ESG that influence lenders to become increasingly selective over which borrowers they support, and at what price, are not going away and will only ramp up over time. Jon Bramwell shares results from our survey of mid-market lenders to understand the direction of travel.
We surveyed nearly 50 UK-based lenders to understand their attitude and strategy towards ESG and sustainable finance for the mid-market, and what this means for borrowers. This follows a similar survey undertaken in 2022.
Key highlights from our 2024 survey include:
- 73% of lenders have an ESG lending strategy in place (2022: 57%)
- 81% of lenders say a firm’s ESG status or ability to transition to net zero will have an increasing influence on their appetite to lend over the next 5 years
- 93% of lenders think regulators may introduce a requirement to integrate sustainability considerations into a bank’s internal capital allocation models for loans – which will impact both the availability and cost of borrowing.
The sustainability footprint and emissions profile of a borrower directly impacts on a lender's own sustainability credentials. Mid-market firms need to ensure they develop a sustainability strategy backed by good quality data and clearly communicate it to their lenders – or over time risk a lender withdrawing their support.
In 2022, Grant Thornton conducted a similar survey of mid-market lenders. At that time, while mid-market issuance of green loans and sustainability linked loans (SLLs) lagged behind that of large, listed corporates – momentum around the ESG agenda was building for the mid-market. This was driven by lenders’ own sustainability targets and disclosures, and their desire to reduce the emissions produced by their mid-market borrowers.
Since then, against a backdrop of inflation, rising interest rates and geopolitical instability there's been a hiatus in this momentum across the board. Global sustainability linked loan issuance fell 55% in 2023 amid concerns around greenwashing and regulatory uncertainty. In the mid-market, we've seen a reticence to take on more borrowing, regardless of whether it's sustainability-linked or not. Many mid-market firms also have concerns around the availability of reliable data and the cost of setting up sustainability linked loans.
This is coupled with more scrutiny from lenders – both around the ESG credentials of the borrower as well as the parameters of any ESG based loan – as they seek to demonstrate the sustainable finance they issue is robust and credible.
Nevertheless, our 2024 survey results show that the direction of travel for mid-market firms remains:
- 84% of lenders believe that demand for ESG related lending in the mid-market will increase in the next 3-5 years
- 81% of lenders say a firm’s ESG status or ability to transition to net zero will have an increasing influence on their appetite to lend over the next 5 years
Sustainable finance products act as facilitators to change the behaviour and sustainability credentials of borrowers. They're also inextricably linked with a lender’s own sustainability ambitions. Mid-market firms need to be cognisant of this. Those that don't have a roadmap in place to improve their ESG credentials may find it negatively impacts their options as soon as their next financing round.
That 41% of lenders said that they could anticipate a time when sustainability-linked key performance indicators (KPIs) and sustainability performance targets (SPTs) could become a compulsory part of any loan document illustrates this.
Despite the headwinds around ESG over the past couple of years, the direction of travel remains the same. Lenders will increasingly be looking for mid-market firms to commit to ESG targets, and a key part of this will come via sustainable finance incentivising a positive ESG impact. Access to capital and the cost of that capital is likely to become increasingly dependent on this.
For more insight and guidance, get in touch with Jon Bramwell or Christopher McLean. You can also read the full survey results here: ESG and access to capital: the mid-market needs to stay alert | Grant Thornton