Blue-chip companies ditch ESG terms in their loans

Chris Ratcliffe/Bloomberg

Some companies that once saw a benefit in adding ESG claims to their borrowing are now backing away.

Mercedes-Benz Group AG, Equinor ASA and ArcelorMittal SA have all dropped dropped ESG (environmental, social, governance) labels from revolving credit facilities this year, according to data compiled by Bloomberg that has been confirmed by the companies.

Norway's biggest oil and gas company rolled over a $5 billion sustainability-linked loan into a regular RCF in November, a spokesperson told Bloomberg. Mercedes did the same for an €11 billion loan ($11.5 billion) in June, a spokesperson for the company said. Both companies said they remain committed to their sustainability goals without giving detailed explanations for their decisions to move away from SLLs.

ArcelorMittal also dropped ESG targets when it refinanced its $5.5 billion RCF in May, with the previous targets outdated, a spokesperson for the company said. Still, the company and banks included a "rendez-vous clause" for within a year to potentially include new targets, though it is not obliged to do so.

Sustainability-linked loans are supposed to create incentives for corporate borrowers to reach ESG goals, such as cutting greenhouse gas emissions. Typically, a borrower is rewarded with lower interest costs if it reaches a stated target. But as the $1.8 trillion SLL market moves into its eighth year, bankers providing such loans are scrutinizing them more, looking to set harder targets for the borrowers to meet.

"The bank industry is more educated and more challenging regarding the level of expectations for key performance indicators and targets for the corporates," said Stephane Lavoix, global head of corporate origination at Credit Agricole SA's corporate and investment banking unit. "That creates some headwinds for corporates that wanted to integrate that instrument."

What's more, there's "the concern around green-washing," he said. "So corporates are balancing between the benefit of implementing such financing and the potential reputational risk there."

Companies contemplating SLLs also face a tougher regulatory environment. The European Union's Corporate Sustainability Reporting Directive, under which the first sets of reports are due early next year, will make it much easier for lenders and investors to tell whether previous corporate ESG claims are backed up by real data.

Bankers that structure SLLs and do not wish to be identified discussing confidential transactions said that corporates, which just a few years ago rushed to add sustainability KPIs to their loans, are reassessing the benefits of linking their debt with environmental goals as those loans come due. The reputational advantages they once perceived are less clear in a more hostile environment toward ESG strategies, and the better pricing they once enjoyed for SLLs has evaporated, the bankers said.

ESG commitment

Mercedes for its part said it's committed to its sustainability strategy and green finance framework, and offers "a comprehensive sustainability disclosure that enables stakeholders to better understand our sustainability agenda" via such things as its sustainability report and ESG conference. Among the KPIs of its earlier SLL was a goal to increase the share of fully electric vehicles among its fleet, a target that would likely have been harder to meet as the luxury-car maker has pared back electrification plans in recent months as EV demand has slowed.

In the case of Equinor, the spokesperson said the company remains committed to the strategic ambitions outlined in its energy-transition plan, including a goal to reduce the carbon intensity of its upstream oil and gas production, which had been a key target of its SLL. The company decided "not to include any ESG linking when refinancing the RCF as we strongly believe the transition is achieved by actions" and its commitment to act is made clear in its transition strategy, the spokesperson said.

ArcelorMittal had been due to release an updated climate report later in the year that would set out new targets for the company, the spokesperson for the firm said. And while the steelmaker considered it important to align the loan KPIs with its new climate ambitions, it didn't want to wait for the report to be published before refinancing the RCF.

Borrowers have raised more than €73 billion of sustainability-linked loans in 2024 which have come down as a share of the EMEA investment grade loan market, accounting for about 20% of issuance in 2024, data compiled by Bloomberg shows. This compares to a record of 30% in 2022, the data shows.

JPMorgan Chase , one of the world's biggest arrangers of SLLs, said in October that the market is now seeing "more sensible structures," which is helping restore credibility to the market.

The U.S. banking giant was one of close to 20 banks that participated in Equinor's $5 billion loan facility, which was signed Nov. 1, alongside Barclays and Goldman Sachs . Meanwhile a 32-bank consortium of lenders coordinated by Bank of America , BNP Paribas, Deutsche Bank and Mitsubishi UFJ Financial Group provided Mercedes' revolving credit facility.