Bankers seek legal cover after backing $1.5 trillion of ESG debt

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.

GregBrown, 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 addons are designed to let lenders strip the “sustainability” claim 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.

The newness of such clauses means it's not yet clear how often clients will end up triggering them. But their introduction is an important signal.

Jamie Macpherson, senior counsel at Macfarlanes, pointed to a letter by the UK's Financial Conduct Authority in June addressed to heads of sustainable finance.

The FCA, which noted that it does “not directly regulate this part of the market,” said then that concerns around the “integrity” of some SLLs had been “corroborated by market intelligence.” As a result, “accusations of greenwashing” may follow, the FCA said.