The Breach of Sustainability Covenants in Finance Agreements: Practical Considerations

The Breach of Sustainability Covenants in Finance Agreements: Practical Considerations

Abstract:

Increasingly, and as a result of recent EU economic policies, financial institutions are paying more and more attention to sustainability aspects when providing finance. The use of sustainable financing also entails advantages for borrowers, both from a financial point of view (as funds can be raised at a lower interest rate and, in the case of smaller companies, it eases access to capital from different investors) and at a corporate level (mainly for reputational reasons).

Thus, at least prima facie, the interests of lenders and borrowers are currently aligned
to channel the development of their respective economic activities through sustainable
financing instruments. However, despite the booming market for sustainable finance, the
subject is notable for its sparse regulation and the self-regulatory nature of the existing one. This being said, and although it constitutes one of the main issues at stake, none of the best practice guides, principles and market standards that currently exist expressly refer to the terms, characteristics or legal consequences of a possible breach of the specific sustainability obligations included in the financing contract.

This means that said consequences are first to be determined according to what is agreed
in the contract and, subsidiarily, to what is laid down in the general rules on obligations and contracts. This paper analyzes the typology of sustainability covenants that rolex replica are usually included in sustainable financing contracts and the consequences that their non-compliance usually entails, both from the perspective of contractual regulation shown by market practice, and under the application of the general rules regarding obligations and contracts.

Keywords: sustainable finance, green finance, breach of contract, sustainability