When American Campus Communities Inc. announced the signing of a $1 billion sustainability-linked credit line in May, its executives decided to take a victory lap.
For the first time, they said, the company was tying its borrowing costs to targets ranging from improved energy efficiency to workforce and boardroom diversity. The largest owner of college apartments in the U.S. even put out a press release touting its commitment to environmental, social and governance goals.
What the statement didn’t say was that the financial incentives embedded in the loan were largely meaningless. American Campus Communities faced no extra cost for failing to achieve its ESG targets, and would save only one one-hundredth of a percentage point in interest — a mere $100 a year for every $1 million drawn — if it met all of its goals.
And this, it turns out, is hardly the exception in the ESG loan business.
A Bloomberg analysis of over 70 sustainability-linked revolving credit lines and term loans arranged in the U.S. since 2018 shows that more than a quarter contain similar provisions: no penalty for falling short of stated goals, and only a minuscule discount if targets are met. Other companies that have widely publicized similar arrangements, including JetBlue Airways Corp. and Prudential Financial Inc., declined to disclose details of their loans.
As corporate America grapples with growing scrutiny of its ESG efforts, firms are increasingly turning to Wall Street to help burnish their credentials. Yet critics say more and more companies are presenting overly polished images of both their commitments and results. The findings suggest that while bank loans offer corporations one of the easiest avenues to access ESG financing, the path is also one of the least ambitious.
“It’s just disingenuous,” said Peter Schwab, a portfolio manager at Impax Asset Management, one of the largest money managers dedicated to sustainable investments. “There is really no material financial impact. I don’t know why some companies even bother.”
American Campus Communities attributed the terms of its deal to the firm being an “early adopter” in the sustainability-linked loan market, and said its public comments ensure the company is held to account by lenders and shareholders for its ESG commitments.
“Ultimately it’s really lender driven,” Ryan Dennison, the firm’s senior vice president for capital markets and investor relations, said of the pricing adjustments the company secured. “We could either do nothing, or we could do something and express some of our ESG goals and work toward those.”
Sustainability-linked loans aren’t to be confused with so-called green bonds that have swept global finance in recent years — and which face significant skepticism in their own right.