ESG Bankers Worried about Legal Blowback for Greenwashing

November 6, 2023 By E.J. Smith - Your Survival Guy

By Ivan Marc @ Shutterstock.com

Only recently, you read about BlackRock’s ironic backpedaling on ESG because of its effect on supply chains for electric vehicles. Now, some more ESG chickens are coming home to roost as ESG bankers are becoming worried that the borrowers they’ve been lending to aren’t quite up to the ESG standards they had claimed. Now the bankers are adding clauses to loans allowing them to strip the loans of their ESG designations. Greg Ritchie and Alastair Marsh report for Bloomberg:

Bankers servicing one of the world’s biggest ESG debt markets are now actively seeking legal protections to guard against the potential greenwashing allegations that may be ahead.

In the handful of years they’ve existed, sustainability-linked loans have mushroomed into a $1.5 trillion market. SLLs let borrowers and lenders say that a loan is tied to some environmental or social metric. But the documentation to back those claims generally isn’t available to the public, nor is the market regulated. Lawyers advising SLL bankers say the reputational risks associated with mislabeling such products are now too big to ignore.

Greg Brown, a London-based partner in Allen & Overy’s banking practice, says he’s seen a surge in clients asking for new legal clauses in SLL documentation. Such add-ons are designed to let lenders strip the “sustainability” element from a loan. So-called declassification provisions mean bankers can just book what had been an SLL as a normal loan, should they subsequently realize the product doesn’t actually merit an environmental, social or governance label.

Rachel Richardson, head of ESG at London-based law firm Macfarlanes, says her firm’s clients are now asking for “more and more” declassification clauses.

“I would describe it as protection for lenders for greenwashing risk,” she said in an interview.

Action Line: You’ve read about greenwashing before. That’s when companies dress themselves up as though they are concerned with the goals of ESG, but instead are simply trying to reap the benefits of an ESG designation. Incentivizing politics over traditional measures of shareholder value will have that effect. Don’t allow fund managers and lenders to throw your money at political causes. Invest in a portfolio of individual securities and control your own votes. When you want help, let’s talk. In the meantime, don’t make the big mistakes with your money. Click here to download my free special report on the Top 10 Investing Mistakes to Avoid.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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