As the financing of green and sustainability-linked loans continues to build pace, we reflect on the recent developments in the loan market and how the insurance market is itself evolving to meet the shared challenges and opportunities.

Despite the economic turbulence of Covid-19, the growth of green and sustainable financing has continued to accelerate as an important tool to address the challenges presented by global climate change. In February 2021, the LMA alongside the LSTA and APLMA issued supplementary guidance to lenders and borrowers in respect of their best practice documentation: Green Loan Principles and Sustainability Linked Loan Principles. The guidance further clarifies the key difference between a green loan and a sustainability-linked loan, being that the former must be utilised for a specific green purpose, whereas the latter need only be linked to broader sustainability targets. Given the volume of capital entering the green and sustainability financing space, these recent updates have been issued to help minimise opportunistic “greenwashing”, where borrowers can benefit from more favourable lending terms under a transaction that purports to have green credentials, but is unable to evidence clear environmental outcomes. 

Similar discussions are underway at a regulatory level where formalised disclosure requirements are being considered for lenders to better understand what proportion of institutions’ lending activity is aligned to green and sustainable outcomes. To this end, on 1 March 2021 the European Banking Authority recommended the inclusion of a “green asset ratio” as a KPI to measure banks’ alignment of financing activities (including loans) to EU Taxonomy - the world’s first green finance classification system. 

Increasing alignment of insurance market appetite with green and sustainability-linked loans

As a result of these regulatory and loan market changes, we anticipate that loans which are more closely aligned to Green Loan Principles standards will become more common in the insurance market. Insurers are paying close attention with similar focus on green financing underway within the wider insurance industry. Lloyd’s of London announced that by 2022 it will issue guidance to its market participants to derive 2% of annual premium income from innovative and sustainable insurance products. As such, we expect to see a greater level of focus from insurers on borrowers’ wider operations and their progress towards cutting carbon emissions as part of the underwriting process. We also expect to see new insurance capacity providers entering the market with environmental targets at the heart of their strategy, mirroring the influx of capital into the green financing space. 

Unlike green loans, sustainability-linked loans are an increasingly frequent feature within the insurance market. These are typically structured as working capital facilities with a margin grid linked to specific KPIs, which insurers are becoming accustomed to incorporating into their own pricing. These margin grids are linked to targets that are specific to the borrower and are typically sustainability-focused, but could also include broader environmental, social and governance (ESG) related criteria. As regulatory change takes effect, we anticipate a continued increase in the volume of these transactions as it is a route for borrowers who are not naturally aligned to a green sector to demonstrate their commitment to meeting sustainable goals.

ESG priorities being embedded across the insurance market

Whilst insurers continue to be primarily driven by the fundamental credit metrics of each specific transaction, there has for a number of years been a gradual but broad refocusing of appetite away from certain fossil fuel risks, with a marked reduction in support for coal projects in particular. 

Historically these decisions were made on a deal-by-deal basis, but insurers are now embedding their own environmental policies at a corporate level through a variety of approaches. These include measuring and monitoring their own environmental impact, reinvesting premium into certified green bonds and for some of the largest global insurers, redirecting capacity away from obligors that aren’t deemed to be making sufficient progress in reducing dependence on certain fossil fuels. 

This approach is symptomatic of a wider market shift as Lloyd’s of London released its first ESG report in December 2020, announcing the phasing out of both the market and the Corporation’s own investments in thermal coal-fired power plants, thermal coalmines, oil sands and Arctic energy exploration activities by January 2022 for new investments, and 2030 for existing exposures.

As part of these regulatory and corporate level changes, Miller is committed to ensuring that our own operations continue to evolve and align to the priorities of our clients. We welcome the opportunity to discuss this subject and how the insurance market can assist with managing your green or sustainability-linked exposures.


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