IFR Asia and LSEG LPC: ESG Bond and Loan Financing Roundtables 2025: Loan Panel
LPC: In Asia Pacific social loans seem to have picked up in the past couple of years. What do you think is driving that and what is the outlook going forward?
Kelvin Lim, DBS: First things first, all of these social financings are done for financial institutions or non-bank financial institutions (NBFIs), which need external borrowings to fund their requirements. So that’s the supply base because without that funding they cannot do business. Hence they need to find ways to borrow, and therefore people start to get creative about it.
A lot of the NBFIs using the social loan approach are Indian. This is mainly because the Indian regulators are trying to reduce lending concentration amongst domestic banks, which creates an opportunity for offshore lenders.
At the same time, NBFIs are also unique to India and are not typical across Asia. People don’t really understand why there’s a need for NBFIs until they realise that Indian banks don’t finance many things such as education, housing and transport.
The second thing is demand. When there’s a shortage of green loans, what else do you look at? You look at social loans.
If you look at the loan market this year, total first-half numbers were down about 35% to 40%. Everyone’s short of assets and therefore you’re going to start to find ways to try and tap into more. At the same time, a lot of these assets came largely from the Indian NBFIs, which everyone is nearing their limits on.
By classing it as a social loan, you then create a new pool of liquidity. While saying that, banks today want to do good but it’s not a mitigator for credit. If you don’t have a good credit standing, no amount of ESG will help to get a bank across the line.
LPC: Shivani, as a private equity firm focused on healthcare and having raised a social loan a couple of years ago, what has been your experience?
Shivani Sahai, Quadria Capital: We launched our revolving US$200m social loan in 2023. The objective was to finance investments in healthcare, pharmaceutical and diagnostic assets that improve access to healthcare across South Asia and South-East Asia. This facility has helped us deploy capital more efficiently, helping companies on their path to making a tangible impact on society. The metrics agreed as part of the social loan framework are fully aligned with our Impact Management and Measurement framework, which helps bring more objectivity and credibility to the way we were measuring and reporting impact through our impact measurement framework. By standardising and refining our key performance indicators (KPIs) across both these frameworks we ensure consistent, transparent and robust assessment of our social and financial outcomes.
More broadly, it also helped us refine our monitoring and reporting processes to third parties, such as the social coordinator.
Having a strong impact thesis, we’ve tried to strategically apply this loan facility to opportunities where we know there is a great impact story, where healthcare challenges are being addressed and where we will have credible impact KPIs for the entire length of the loan journey.
LPC: Roy and Kelvin, would you be willing to arrange a social loan for Quadria Capital when it comes up for refinancing in a couple of years, maybe?
Kelvin Lim, DBS: The honest truth is we would need to dig a lot deeper. Five to seven years back, when everyone started this whole ESG agenda, the sustainability performance targets (SPTs) were quite random. Bankers were just eagerly trying to find ways to classify loans as green because it was a new concept and everyone wanted to get on the bandwagon.
But today, people are going through a much more rigorous SPT approach. In terms of studying the underlying and trying to classify, “Is this an ambitious enough target?”
One example is four or five years ago I did an SLL loan for a corporate and they said, “The SPT is A.” “Yeah, but you have already achieved A.” “Yeah, but that’s our target for the end of the year. So we want to go in with that one basis point discount on day one.” That’s the classic Asian mentality. Everyone laughs about it, but I’m sure we have all had our own fair share of these encounters.
That’s changed now. So will we lend? We will certainly consider it, but it’s hard to say whether you will or not without looking at the details.
Roy Chan, Credit Agricole CIB: I agree with Kelvin. Social use of proceeds are unlike green whereby there’s a taxonomy and there’s a lot of precedence to review.
In terms of KPIs and SPTs, I think the tricky part about social KPIs is that it’s not and cannot be science-based. It’s something that the bankers will need to evaluate based on how aggressive those targets are and whether there’s any improvement.
That’s why the Sustainability-Linked Loan Principles (SLLPs) are so important. They serve as a basis to guide the market on how to decide these KPIs or SPTs.
Having a base is also beneficial because it doesn’t restrict the market from going in just one direction. It opens room for ideas and innovative solutions when it comes to structuring the SLL.
LPC: One of the hottest sectors we’ve seen in the past couple of years is data centres. What are your thoughts on these financings and the opportunities this sector presents for ESG financings?
Roy Chan, Credit Agricole CIB: Data centres are certainly a hot topic. Driven by AI, cloud and potentially quantum computing, this landscape is evolving fast. However, there are multiple challenges given that it is so energy-intensive. Based on an International Energy Agency (IEA) estimate, data centres contribute about 1% to 3% of global energy consumption.
The key challenges are probably threefold. One is the liquidity because in Asia most data centres are financed in the loan markets. Obviously, this liquidity at some point will be limited and then alternative sources of funding will have to be sought.
Second is operational resilience. The data centre market is very competitive. If these providers are not able to provide their underlying customers the full suite of services, they can easily be eliminated or replaced. This competitiveness expresses itself in terms of ESG as well, because multi-national corporations look at the underlying data centre operator’s ESG performance. And even at a regulator level when data centre operators bid for the projects, ESG can be one of the key considerations.
Lastly, it’s the water aspect. When it comes to energy consumption, water can be a complementary metric when measuring the energy efficiency of a data centre because water can be used to offset the energy that’s required.
Obviously, we’ve seen a lot of very innovative transactions out there for data centres, especially within SLLs. But personally, I would like to see the market evolve further.
Power usage effectiveness is the key metric for data centres. But that is only measuring the energy losses from the data centre infrastructure. The next thing to look at is really the improvement on the underlying IT equipment and cooling techniques.
LPC: Kelvin, do you have similar thoughts?
Kelvin Lim, DBS: If you think about it, the build-out of Asian data centres is still very much in its nascent stage compared to where China or the US are in terms of the data centre capacity per capita.
As capital solution providers we must go to where capital is needed. As the per-capita capacity is being built out, it is inevitable that we figure out how to finance it.
As banks, what we should really do is try and look at how we are going to make this more sustainable. How can we work with our partners to put in something ambitious? Can we help work with these companies to figure out what the new technologies are to cool better or be more efficient with using energy?
Green energy is also a huge part of this. How are we going to help them source the green energy that they need to ensure that data centres are sustainable? But I do agree with Roy’s point that for every megawatt of green energy that’s diverted to a data centre, some green energy is taken away from something else. So it’s a zero-sum game, which is something that we need to be mindful of.
LPC: In the loan market we have seen quite a prolific flow of sustainability-linked loans. Why are SLLs so popular whereas sustainability-linked bonds (SLBs) have slowed down?
Kelvin Lim, DBS: The first reason is that SLLs have no specific use of proceeds making it easy for anyone to tap. Larger corporates, which have already conducted some kind of organisational sustainability study, are the main issuers of SLLs, so setting those SPTs is not quite as difficult.
I think the second part is the number of green bond funds in the world. In comparison, every bank has an ESG loan target, so the sheer amount of capital going after SLLs versus SLBs is quite different.
Also on an SLL, you deal with fewer parties, probably one or two banks, maybe a club of three or five banks. It’s a lot easier to negotiate when things don’t go your way than if you get into a bond and it becomes a huge public statement with a whole PR fallout.
Roy Chan, Credit Agricole CIB: If I put myself in the borrower’s shoes, most SLLs are step-downs, whereas for SLBs, most of them are step-ups. So, commercially, that may be the reason why borrowers are more open when it comes to exploring SLL.
Another reason why SLLs are becoming more popular is the greater availability of ESG data. Regulators are pushing for greater ESG disclosure, which encourages companies to collect this information. And with more information available, they are able to set more specific targets. So, effectively, it’s also driven by regulations. The Singapore government is strongly pushing ESG disclosure and that helps in some ways to drive the SLL market.
The question would then be, how much is enough for them to consider an SLL in terms of the margin adjustments? And the follow up question is whether it justifies taking the extra effort to do the monitoring?
The size of the loan matters. US$1bn versus US$100m – one basis point in terms of absolute return for the US$100m would be really small as compared to US$1bn. But the cost that they incur in terms of monitoring and paying for the limited assurance is fixed. So, it’s not a like-for-like comparison, it’s an interplay of multiple factors.
LPC: But that cost you are talking about is something that can be amortised over the long term. Once you have a framework in place then it’s there for a few years, right?
Kelvin Lim, DBS: But there is also an ongoing maintenance cost. You have to keep doing it and that’s a point that we hear quite a bit. There are some borrowers who started off with a US$300m SLL, and they’re now saying, “The savings don’t quite make sense for me. I don’t really want to do it anymore. Can we just take this away?” It is a real problem.
As a market practitioner though it’s not that we don’t want to give a bigger discount. We would love to do the right thing for the world. But one thing is that being an SLL does not change the risk profile of the transaction. At the end of the day, every credit is priced against a certain risk profile and the probability of default doesn’t change just because this is green.
The Asian loan market is also highly competitive. I could offer a client 100 basis points for an SLL, with a five basis point discount, which is quite huge for a 100 basis point spread. But tomorrow, Roy could offer it at 95 basis points while scrapping the SPTs. These are real issues that we tackle. If these options are there, you are going to have borrowers who opt to go the easy route.
LPC: Shivani, Quadria Capital was the first fund in the world to raise an SLL, when it closed a small deal for a US$65m revolving capital facility in 2019. Can you take us through that transaction?
Shivani Sahai, Quadria Capital: Yes, so we’ve always had a strong mandate for ESG and impact investing, and because our focus is only on healthcare, there is a clear impact case in any investment that we made. For the US$65m revolving facility in 2019 the objective was to link the ESG KPIs and milestones with the loan’s payment structure. We set specific ESG targets for our companies as part of our ESG action plans, which we monitored monthly.
Over time we’ve used that facility for financing a couple of our impact-driven healthcare investments. Naturally it made sense to evolve from an SLL to a social loan, because it allowed us to set targets and align them with our Impact Management and Measurement framework.
We did some work over the last two years trying to get more rigour and credibility in the way we look at impact KPIs across the different healthcare sub-segments that we’re investing in. We became signatories to global ESG and impact principles and got third-party verification on the framework as well. So as a next step, we thought about having a loan where we can collaborate with the bankers to pre-determine the KPIs, which are also linked to our IMM framework.
There is a focused list of 15 to 20 KPIs specific to the different healthcare sub-segments that we are managing. This helps to bring clarity and focus in the way we measure and report. And because this is a social loan structure, it also introduces third-party verification, so there’s credibility to the data from the companies as well, and that gives us confidence in our fund impact reporting.
LPC: Is that two to five basis point incentive that you get as a borrower enough to maintain this programme?
Shivani Sahai, Quadria Capital: While the basis point incentive is helpful, it’s not enough. More than that, it’s the strategic advantage you get in your investments. We have a lot of limited partner pull, which is development finance institution and impact-investor-driven. They look at how closely we integrate ESG criteria; how we measure and report ESG and impact data; what are the ESG drivers for us at exit and overall, what’s the incremental impact that we’ve made?
Beyond just the pure basis points improvement, it’s the strategic relevance for us, it’s the operational capabilities and the development of robust processes and practices to report transparently. And then lastly, of course, it broadens the pool of investors, giving access to a wider pool of capital aligned with our impact and sustainability goals.
LPC: This year has been very volatile for all types of asset classes. Overall loan volumes have not been that great. Is the trade war having any impact on ESG financing per se, or is it just a function of the overall market?
Kelvin Lim, DBS: The honest truth is there’s bound to be some impact in terms of trade and investment, particularly in Asia, because Asia is the producer, and the West is the consumer.
What really happened in the last three to five years was an investment away from China, creating that base outside of China to protect themselves from any potential trade fallout between China and the US, largely. But what happened on Liberation Day is that it’s no longer about the US and China, it’s about the US and the rest of the world.
So, number one, there is already some excess capacity built up in the system. Number two, there is still that spare capacity in China because of the way the economy is performing. Volumes are down because investments are clearly not going to go in as urgently. Three or four years ago, it was urgent because everyone needed a base outside of China. China was the only factory in the world. Today, South-East Asia has supplemented a good percentage of that.
Now, with all of this capacity, are they going to invest again? I don’t think that picture will clear up until there is greater clarity around all these trade deals and where all the corporates are going to redivert their manufacturing capacities.
If anything, I think there’s going to be a lot more onshoring, which means investments into the West rather than in Asia, provided that they can keep up with the cost pressures. So that’s one of the large factors driving volumes in the loan market down because there is just simply no capital investment.
Yet if the loan market volumes are down, do we expect ESG loan volumes to come down accordingly? ESG loan volumes are still being held up because of green energy investments, which are still going on in the region in a very big way.
But those projects do take a lot of time. For example, Singapore has been talking about importing power from Batam for the longest time. I don’t know when the financing will come. Maybe next year or five years later but when it happens, it’s a huge investment. Things like that will happen over decades and so ESG is not going away.
Roy Chan, Credit Agricole CIB: While the trade volumes are going down, relatively, Asia Pacific’s ESG-labelled loans constitute about 20% of overall loan volumes. If we compare this to 2023, it was about 14%.
Meanwhile, globally, ESG-labelled loan volumes went down from about 12% to 10%, mainly driven by the drop in North America region at 5% in 2024.
Undeniably, these differences are mainly due to ESG backlash from the USA. In Asia Pacific, we still see two different borrower groups.
We have one group that still strongly believes in ESG, who will do an ESG-labelled loan and have a very strong in-house ESG capability. Then you have the other group who will question relevance of ESG in the near term.
Banks will then have to actively engage and educate them, especially for those in the hard-to-abate sectors. Ultimately, some banks and investors also have a decarbonisation trajectory for various sectors, and companies in the hard-to-abate sectors know that if they don’t take the necessary actions, the conversations may get difficult over time.
LPC: So is the bank market willing to do a green loan for an oil and gas company or a coal miner?
Kelvin Lim, DBS: I think it’s not impossible, but the question is, can you find the right use for it? These have been explored many times before. For example, in Indonesia there are so many coal miners who are always trying to transit out and have been constantly engaging the banks.
But one of the biggest issues that you will find is because coal contributes so much to the company’s earnings, and whatever they’re going to invest in is going to be so small, how do you lend to them on a corporate basis? Unless you ringfence the use of proceeds or the project, which may be on a pure greenfield basis, which sometimes it makes it difficult to do. So there are certain credit and financial considerations behind how we actually try and solve these problems.
It’s not an easy problem to solve.
LPC: Shivani, what are your thoughts on whether there should be a common taxonomy for all of Asia Pacific?
Shivani Sahai, Quadria Capital: I don’t think you can have a common taxonomy because of the regional contexts and development needs of each country. While the ideal scenario will be to have a common taxonomy, realistically, this is not possible. I think the ASEAN taxonomy provides a strong example, where they have included a foundational basis, ambition levels and country-specific dynamics. However, it notably lacks a social component attached to it. Similarly in India a climate finance taxonomy has just been drafted. But again, the social aspect is missing there as well.
Of course, the goal is to be net zero by 2070 in India, and the alignment in the taxonomy follows that. But generally, while a lot of work has gone into some standardisation with the EU taxonomy, the next step is integrating the social component in it. Establishing a social alignment framework and a standardised regulatory barometer with clear, prescribed criteria will be essential for advancing sustainable finance in the region.
LPC: So you’re saying that it’s got to be a regulatory push rather than from banks or investors or companies?
Shivani Sahai, Quadria Capital: It’s really a coordinated effort across the entire ecosystem. Regulators have to set the necessary guardrails. Meanwhile, financial institutions need to keep the momentum in terms of financing the right kinds of projects and setting the key criteria for evaluating ESG and social loans.
Equally important are companies – they should have strong governance structures in place to ensure transparency in the way they measure and report on those standards.
Roy Chan, Credit Agricole CIB: We have to understand the purpose of having a regional or local taxonomy. The ideal scenario is to have a common taxonomy. But realistically, it has to overcome plenty of obstacles, because if you look at the nationally determined contributions of different countries their net zero targets are inconsistent. There’s a mix of 2050, 2060, 2070, and that also means that the economic development, in terms of balancing social and green agendas would be at a different pace.
While we see a lot of new taxonomies with transition categories, the criteria is different because countries are transitioning at a different pace.
Establishing a common ground taxonomy would be beneficial. The Singapore government came up with the multi-jurisdiction common ground taxonomy, and that initiative is great. Also, the China common ground taxonomy, which gives the market more guidance, especially regarding offshore transactions with multiple stakeholders being involved. Credit Agricole CIB has been sharing our knowledge with the market to help bridge the gap between taxonomies.
LPC: Do you think the KPIs and the metrics in loan agreements need to be standardised? For example, some of the domestic loans in Taiwan have targets relating to corporate governance.
Kelvin Lim, DBS: I think a common taxonomy is definitely helpful but we have to be realistic. In the bond market, you regulate the instrument and the issuing entity, which is easier.
However, in the Asian loan market, you get Singaporean or Taiwanese banks lending to India, to Malaysia or to Thailand. So then there are two sets of taxonomies to deal with.
Then, as we walk into a deal, there are Singaporean; Malaysian and Thai banks, and all of our taxonomies are different. How do we look at a transaction whereby our guidelines are different? It’s difficult.
The second point is that the loan market is a private market, whereby details do not get disclosed openly. I think it’s best kept that way because the loan market acts as a torchbearer for the bond market to eventually follow.
So a common set of taxonomies will help in terms of setting the guidelines, but it has to be loose enough to allow for experimentation, to get creative about pushing some of these boundaries. Similarly, because we are allowing for experimentation, we must also then allow for some room for things to fail.
This is more a message for the regulators as they try and set up those ground rules. I don’t think it should be rules, it should just be set as guidelines or broad principles which organisations or banks should follow.
LPC: Thanks. One other point is about ESG loan maturities. These transactions typically have three to five-year tenors. So, Shivani, as a borrower, would you prefer longer tenors?
Shivani Sahai, Quadria Capital: When it comes to social loans, it takes time to work with the companies to demonstrate meaningful impact. The first year goes into aligning KPIs. Usually, we have an ownership period of about five years and internally we consider it important to ensure that we have created lasting value when we’re exiting.
But when it comes to ESG loans, such as those focused on initiatives around decarbonisation or supply chain optimisation, you can monitor these more easily within a three or four-year timeline. That’s what we did in the first loan we took, but in the second one, because impact is subjective and monitored over a longer-period, we have to continue to work with the companies. At the end of the day, we make sure that impact is intrinsic in the business model; the way they measure their core healthcare outcomes and the way they ingrain it in their business model stays. Then even if the loan matures, sustaining that impact-focused trajectory and governance is what counts.
LPC: Roy and Kelvin, what are your thoughts? Shivani comes from a private equity background, but are there other types of borrowers that may have different considerations?
Kelvin Lim, DBS: For loans, the most efficient capital range really lies within the three to five year range, and that’s why most of the deals have that duration.
It’s not that we cannot do long-dated ESG loans, because the reality is, when we finance green renewable energy projects, we go up to 15 years, depending on the offtake agreements.
I think the question for us is really what’s the basis of measurement? If you are talking about an SLL, yes, it’s always going to be three to five years because it really is largely a corporate borrowing. I don’t think that any of this is ESG-driven in that way. It’s just the nature of the market and the loan.
Roy Chan, Credit Agricole CIB: There are infrastructure financings that are longer-dated where the financing structure changes according to the stage of the project.
For SLLs, a long tenor is definitely possible. What can be done is that instead of setting targets for the next 10 years, borrowers can set it to three to five years first and structure a clause to revisit the targets at a certain date, just before the end of the three to five years to decide about future targets. Or borrowers can include certain clauses to cover unforeseen circumstances or certain events. When it triggers a review event, the borrower can revisit the SPTs.
LPC: With banks being the lenders and also the biggest borrowers in the ESG financing market do you think the growth of the market hinges on how they carry on this activity as borrowers or as lenders?
Kelvin Lim, DBS: I think banks are evolving. Five years ago, half the banks in the market still did thermal coal. Today, thermal coal is a no-go zone. Going forward, are they still going to finance upstream oil and gas? That’s a big question mark. Everyone wants to do renewables, and now everyone’s starting to dip into social loans.
Banks have set their own net zero and social targets that we all have to work towards. And, of course, there’s also the portfolio size perspective that they need to look at.
But ultimately the reality is that climate change is real. All of us are feeling it today.
I haven’t seen a bank today say, “Oh, just because the US is going to pull back on their green promises, we can now start lending to thermal coal again.” No, that has not changed. The trajectory will only continue.