New research from leading business and financial adviser Grant Thornton UK LLP has found that ESG credentials are an increasingly important factor for mid-market businesses seeking to access capital.
Despite sustainability-linked lending not being as prevalent as it was a couple of years ago, the forces driven by ESG that influence lenders to become increasingly selective about which borrowers they support, and at what price are not going away and will only ramp up over time.
The study, which follows a similar survey from 2022, asked nearly 50 UK-based lenders about their strategy around, and attitudes to, ESG and sustainable finance for the mid-market.
Key findings include:
- 73% of lenders have an ESG lending strategy in place (up from 57% in 2022).
- 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 five 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 the cost of borrowing.
“Against a backdrop of inflation, rising interest rates and geopolitical instability there’s been a hiatus in the ESG linked funding agenda. Global sustainability linked loan issuance fell 55% in 2023 amid concerns around greenwashing and regulatory uncertainty,” says Jon Bramwell, Debt Advisory Director at Grant Thornton UK.
“However, lenders are committed to meeting their own sustainability targets and disclosures, and consequently are increasingly focused on the emissions produced by their mid-market borrowers.
Intensifying Scrutiny and Disclosure Demands
The survey findings reflect an intensifying focus on ESG factors across the lending landscape that mid-market companies can ill afford to ignore. As regulatory regimes governing climate risk and sustainability disclosures take shape, lenders themselves will face mounting compliance burdens and pressure to align their portfolios with net zero commitments. Consequently, borrowers can expect far more probing due diligence into their carbon footprints, transition plans, and ESG governance frameworks.
“For accountants and finance professionals, this signals a shift in the data, controls and assurance processes required around ESG metrics and disclosures. Mid-market firms will need to treat ESG data with the same rigor as financial reporting, implementing robust measurement, data governance and external assurance to ensure lenders can rely on the information presented.
The introduction of standards like the International Sustainability Standards Board’s baseline requirements will drive this disclosure overhaul. However, lenders are also developing their own bespoke ESG scoring methodologies and risk adjustments within capital pricing models. Firms will need to navigate these complex and evolving requirements.
Embedding ESG Across the Enterprise
Beyond just enhanced disclosure, mid-market companies must demonstrate tangible progress in decarbonizing and mitigating ESG risks throughout their operations and value chains. This means ESG considerations must permeate corporate strategy, capital allocation, procurement practices, product design and more.
Treating ESG as a siloed compliance exercise won’t be enough; lenders want to see ESG baked into business models – clear transition pathways, accountability at the board level, and credible execution plans. Those that fail to take a holistic approach will face a higher cost of capital or be shut out altogether.
As ESG factors become fundamental to long-term resilience and value creation, the mid-market can expect lenders to exert formidable influence in accelerating this transition in the years ahead.
“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 on the price and availability of capital as soon as their next financing round,” says Bramwell.