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Alternative Investments

SMEs underutilising global sustainability-linked loans


German asset manager DWS has reported that the use of global sustainability-linked loans has declined from a peak of $200bn (£160bn) in 2021.

The interest rate of sustainability-linked loans varies depending on the small- and medium-sized businesses’ (SMEs) progress towards an environmental, social, and governance target.

However, DWS found that fewer than between 10 and 11 per cent of European SMEs have used these types of facilities.

Read more: DWS boosts alternative credit team with London hire

In a research paper on energy efficiency policies and investments, DWS pointed out that banks and private debt investors can lend to companies that own or use buildings that are subject to minimum energy performance standards (MEPS), which can take the form of sustainability-linked loans.

However, a DWS Real Estate Debt Update Report from October 2023, flagged that a “continued polarisation within the real estate market and a rising risk of obsolescence for non-energy efficient properties have resulted in an increasing focus on the quality of underlying assets”.

It said buildings that meet the highest environmental standard are likely to achieve higher rental growth, maintain their value better and offer greater liquidity upon selling, all of which may reduce risk from the lender’s perspective.

Meanwhile, restrictive monetary policy and a weakening economic environment has led to an increase in risk aversion from lenders.

Read more: Investec names Alicia Forry as head of ESG, alternative investments

The DWS Real Estate Debt Update Report said lower quality buildings already have greater difficulty in securing financing, and the asset manager predicted it would see rising margins for such assets, as well as more restrictive [financing] terms.

However, real estate managers working with the Urban Land Institute (ULI) are attempting to address the risk of real estate stranded assets by developing and promoting a series of sector wide changes, according to DWS.

These include standardising data sharing between buyers and sellers on the cost of renovating buildings to meet MEPS goals, which could help the real estate industry integrate transition risk in valuations and reduce stranded asset risk.

Read more: DWS hires Man Group veteran to launch CLO business





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