Tangible Effects on The Restructuring Environment
Everyone is talking about sustainability – but very few companies have already adapted their business activity and governance to meet the new regulatory requirements. The transformation process has been initiated in many places – rethinking has been announced in numerous sectors – but the process will extend over several years.
For companies this is not only about sales opportunities for their products, but also about ways to raise capital. ESG is thus a question of both product sustainability and refinancing. “Large” issuers are being obligated to report on the sustainability of their business activities, and financial intermediaries to inform their clients on the sustainability of financial products.
The legislature creates economic incentives to invest in a sustainable manner, thus influencing capital flows.
Two sets of rules are of central importance: taxonomy and the Disclosure Regulation. The former defines which economic activities are “green” – and thus serves in particular to prevent green-washing. The latter enables investors to understand the extent to which the financial products they acquire are sustainable. The goal is to create transparency and comparability through disclosure. It is intended that investors be put in a position to be able to make conscious decisions with respect to ESG.
The new requirements are increasingly having a tangible effect on the restructuring environment. Whether refinancing or taking on additional loans, sustainability factors are already influencing the decisions of banks and other capital investors. Only those who have made provisions will also have greater chances in finding a partner that is willing to financially support the continuation of the business model. Those who have not implemented any sustainability concept whatsoever will pay a greater price for financing in the future. In the worst case a new capital investor will not even be found.
There is still a lack of awareness of the changing requirements, particularly among smaller companies. On the one hand, there are legal reasons for this: The requirements concerning disclosure of the sustainability of business activities in non-financial reporting typically do not apply in these cases. On the other hand, there has often not been an identified need for capital, and the smaller companies are not capital market-oriented – thus, there is no need to grasp optimizations on the refinancing side.
However, the approach will fall short: Overall, the ESG rules specifically aim at redirecting capital flows towards sustainable business. It is about transforming value chains. For example, banks are being obligated (in multiple steps through 2026) to disclose a “Green Asset Ratio.” By that time at the latest, loans to and business relationships with companies that are not in a position to provide key figures concerning sustainability will have a premium imposed on them – this can already be seen in some cases today.
For example, some major banks have already written to their clients in recent months to obtain information on the sustainability of their business activity.
With the expiration of the state Corona support aid, the topic will also become critical for smaller companies if borrowing (new) third-party funds becomes necessary. For SMEs, the success of a restructuring will in the future also increasingly depend on attention being paid to measures to increase sustainability as part of the restructuring concept.
Restructuring concepts will therefore have to contain a sustainability planning.
Investments that are made for this purpose can today already be classified as sustainable, making it easier for investors to meet ESG requirements in restructuring. However, achieving 100% sustainability is neither necessary nor advisable. According to the current legal developments, it could be fully adequate to just achieve a degree of sustainability of over 75% to be considered sustainable in the market.
Bernd Geier is a partner focused on finance, regulatory law, and funds. His practice covers the entire spectrum of regulatory issues (compliance), with a focus on the financial sector, including FinTech. He advises clients on financial market regulation, transaction structuring and optimisation, outsourcing law, as well as on new technologies (cryptocurrencies) and sustainability requirements (ESG). Read more here.
Oliver Otto is a Partner in Rimon’s Frankfurt office. He focuses on restructuring, bankruptcies, as well as banking and finance in the finance, technology, energy, and manufacturing sectors. Mr. Otto advises clients on insolvency risk remote design of investments, on financial restructuring measures, non-performing investments and (exit) strategies as well as portfolio solutions, and debt trading. He represents creditors in formal insolvency proceedings as well as debtors in their crisis and debtor-in-possession proceedings, and provides counsel to corporates and directors in near-insolvency scenarios and advises on fraudulent insolvencies. Read more here.