Corporate Governance

2020_Corporate Governance and Executive Compensation

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Shearman & Sterling LLP The Rise of the Green Loan Market | 33 The Rise of the Green Loan Market Mehran Massih and Jason Pratt Insights 1 See Jon Hale, "U.S. ESG Funds Outperformed Conventional Funds in 2019," https://www.morningstar.com/articles/973590/us-esg-funds- outperformed-conventional-funds-in-2019 (April 6, 2020). Driven by stakeholder pressure, public companies are increasingly making so-called "green" and environmental, social and governance (ESG) commitments and investments. An outgrowth of this trend is the use of green and ESG-linked loans to pay for these commitments and investments. The rise of this green loan market follows in the footsteps of the now firmly-established green bond market. Challenges to green loan market participants include how to to select, measure and validate green loans, and how to allocate green risks in loan documentation. Perhaps the greatest challenge for green finance participants in general, affecting both loans and bonds, is the risk of "green washing" — i.e., market confusion regarding whether green-promoted financial products in fact further market participants' publicly-promoted green goals. To manage green washing risks, industry groups have promoted guidelines, most notably the so-called Green Loan Principles and the Sustainability-Linked Loan Principles, to bring order to a still rather ad hoc and voluntary green finance market. There is a widespread perception, however, that industry-driven, voluntary guidelines are insufficiently robust to prevent market confusion. To promote more uniformity, the European Union (EU) is taking steps to adopt standards for green and ESG-linked financial products. The United States for the most part has not yet followed suit. There are signs, however, that the U.S. Securities and Exchange Commission (SEC) may be moving towards mandating uniform green disclosures in SEC- regulated documents. A review of public-disclosures demonstrates that participation in the green finance market is itself now part of banks' and companies' ESG narratives. In response to the COVID-19 pandemic, borrowers shifted from advancing strategic objectives, including ESG objectives, to shoring up liquidity. That said, a focus on corporate ESG initiatives remains strong. Recent scholarship indicates that green and ESG-linked financial products are out-performing products without green attributes, and that the investor market does not perceive a downside to directing investment to these products. 1 We anticipate a continuation of the rapid expansion of this market. KEY TERMS Commonly-used terms in the green loan market include the following: Green Loans Green loans are any type of loan instrument made available exclusively to finance or refinance green projects, such as those tied to increasing energy efficiency, reducing or controlling carbon emissions or reducing water consumption. ESG Loans ESG-linked loans, also referred to as ESG loans, are any type of loan instrument and/or contingent facility, such as a bonding line, guarantee line or letter of credit, that incentivizes the borrower to meet pre- determined sustainability targets. Continued on next page.

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