Fintech firm Finastra has launched an automated solution aimed at helping banks streamline sustainability-linked lending.
ESG Service is designed to manage the key performance indicators (KPIs) and ESG pricing changes of sustainability-linked loans. Aimed at credit managers, borrowers and sustainability coordinators, it uses open application programming interfaces and can support varied deal structures.
Sustainability-linked loans align loan terms with a borrower’s performance against sustainability targets. An improved ESG rating can lead to a cheaper cost of capital, while a lower rating might incur penalties.
“Sustainability and ESG are now key criteria in a bank’s lending journey. From a client borrower perspective, they also want to see banks looking to help them fulfil their own sustainable goals and ESG targets,” Simon Thorogood, Finastra’s senior director for corporate and syndicated lending, tells GTR.
“We’re now seeing more of these loans coming through where there are KPIs linked to the transactions, which add further complexity to the whole lending lifecycle,” he says.
Finastra says that tracking multiple moving parts within complex pricing structures against targets can “tie up resources and limit banks’ scope in terms of ESG product offerings and introduce risks associated with manual processes”.
“The tool will capture all the data needed from a margin ratchet perspective, and then feed that into the back office system,” Thorogood says. “We built it to be integrated into Loan IQ, which is our flagship product, but the idea is that it is a standalone tool that can be used for any sustainable product.”
In trade finance, many banks are now offering sustainability-linked working capital facilities and supply chain finance programmes to clients, including sectors long criticised for their environmental impact, such as energy trading and palm oil production.
Thorogood says Finastra will “look to expand the scope of its ESG Service beyond sustainable linked loans to any asset class, including bonds and trade finance products – essentially, any asset classes where ESG margin adjustments can be derived based on performance against ESG KPIs”.
“It’s a big, evolving area that is going to get bigger. More regulation is coming in. I think in the next couple of years, we’re going to see huge growth in this,” he says.
Thorogood adds that the service is currently in its first iteration and that Finastra will be looking to work with other partners, including ESG-focused fintechs, in the coming months, with one priority being to automate the service as much as possible.