Sustainable funding in higher education is on the rise

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said Graeme Aithie of QMPF Refinancing aside, most UK university capital market activity over the past 18 months has followed either a green or sustainable funding framework.

“We expect this trend to continue, given the natural alignment of this form of borrowing with the strategic goals of university providers and as universities increasingly embed net-zero and energy transition projects in their investment plans,” said Aithie. “Sustainable approaches to funding allow a university to make a clear public commitment to these ESG-related goals, which are becoming increasingly important for stakeholders and students.”

“Sustainable finance principles can be supported by a relatively wide range of project types that typically map well with most real estate investment plans. Universities must first assess which of their capital projects are potentially suitable for “green” or “social” goals in order to assess whether the “use of proceeds” approach is appropriate, although in general we find that the majority are eligible, particularly under the “green” targets. There is also a need for a more comprehensive commercial assessment, considering whether sources of financing or third-party grants are available for specific projects, before making a decision to finance with core balance sheet loans,” he said.

Pinsent Masons has also advised University College London on a £300m sustainability bond, the first listed sustainability bond in the industry, and the University of London on their £50m sustainability linked loan agreement.

Sustainability-related loans can refer to any type of debt or loan facility and even to guarantees or conditional lines of credit that incentivize the borrower to achieve sustainability-related goals. The borrower’s sustainability performance is measured against sustainability performance targets (SPTs). SPTs are predefined tests, typically based on objective metrics or external ratings, to capture improvements in the borrower’s sustainability profile.

Sustainability-linked loans typically do not restrict the use of proceeds and can therefore be used for general corporate purposes. The performance of the borrower against the SPTs will result in margin repricing over the life of the instrument.

Aithie said sustainability-linked lending is most common in the context of shorter-term lending. He said this reflected the challenge of developing performance targets that could apply over the life of a private placement – typically 15 to 50 years.

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