With this as the backdrop, the recent Women in Fund Finance (WFF) Sustainability webinar brought together a panel of industry specialists to discuss changing appetites and future priorities in fund finance transactions.

More than 200 people from across EMEA, the US, and APAC registered for the event, co-sponsored by NatWest and WFF and moderated by Caroline Haas, NatWest’s Global Head of Climate and ESG Capital Markets.

As well as pointing to the momentum already created by sustainable finance, the panel discussed recent headwinds, particularly from the US. Despite these, it was agreed that sustainable finance products are no longer optional add-ons but are necessary components in every fund finance conversation, similar to any other covenant.

Some key takeaways from the session included:

• Green Loans have surged as a financing tool, with fund managers often finding it easier to align these facilities with their investment strategies.
• Regulatory frameworks will shape fund finance’s sustainability journey in the future, with a growing need for standardised, verified ESG data.
• “Green hushing” may occur as the industry moves its focus away from sustainability but quietly continues with environmental initiatives already underway.
• Sustainability-Linked Loans (SLLs) which were high in demand in 2020–2021 have experienced a cooling off in recent years.
• Adaptation finance holds great potential. As climate risks intensify, funding that supports resilience will become increasingly important.
• Nature finance is emerging as a biodiversity and habitat protection solution, but addressing physical climate risks requires a broader view than carbon metrics alone.

Investor expectations and regulatory requirements have intensified, making ESG considerations a necessary part of fund strategies rather than a “nice-to-have”, Caroline Haas told the panel. Sustainability is a financially material factor for funds, actively addressing risk preservation, opportunity capture, and operational resilience, she said.

When ESG was reframed around concrete goals like decarbonisation or transition, resistance softened, suggesting that clear, financial framing of sustainability issues resonates more deeply with investors and stakeholders than more abstract ESG labels.

And she suggested that with shifting global attitudes to sustainability there could be a period of “green hushing” in future months.

“You're going to feel that people are moving away from it, when actually a lot of the groundwork has been done and will continue to support decisioning,” she said.

The panel discussed the divergence in appetite for SLLs and Green and Social loans in recent years. Laura Smith, a partner at Travers Smith, explained that the use of SLLs exploded in 2020–2021 but has since cooled, partly due to concerns around the robustness of KPIs and regulatory scrutiny. Meanwhile, Green Loans have surged, with fund managers often finding it easier to align these with their investment strategies.

In fact, Green and Social Loans – which require proceeds to be used for specific environmentally or socially beneficial activities – have grown from about 11% of the market in 2021 to around 24% in 2024, highlighting the sector’s appetite for easily tracked, sustainable products.

“It's inevitable when you have a period of innovation there's a period of consolidation, where the market takes a step back and thinks about how things are going to be structured, and how we can introduce some standardisation,” said Laura.

The developing landscape will continue to present its fair share of challenges. Funds typically have limited operational footprints and uncertain investment pipelines, making it difficult to craft meaningful KPIs. The short tenures of fund facilities add another challenge, leaving little time for sustainability targets to mature.

The panel discussed how verification can also present roadblocks. Gemma Lawrence-Pardew, Head of Sustainability at the Loan Market Association (LMA), said that third-party verification requirements, while crucial for credibility, can impose significant costs and administrative burdens – sometimes undermining the economics of a transaction.

And the lack of standardised metrics, especially in emerging areas like biodiversity, complicates assurance processes.

Other difficulties discussed were higher interest rates and the growing risk of public criticism and legal action. Greenwashing accusations, even unfounded ones, can damage reputations, making lenders and borrowers more cautious about some sustainability-linked products.

To counter this, innovation in loan structures should continue, Gemma said. Using a bond to (re)finance a pool of sustainability-linked loans, as exemplified by the Sustainability-Linked Loan Financing Bond (SLLB) structure the LMA recently collaborated on with the International Capital Markets Association, is an example of how new structures can benefit the industry.

“You're starting to see overlap between the products, and hopefully this will provide new liquidity,” she said.

Other instruments, such as ESG ratcheting can increase engagement between lenders and borrowers, said Caoimhe Bain, Head of ESG at Hayfin Capital Management.

“We recognise that ESG-linked margin ratchets are more appropriate for some deals over others and apply them on a case-by-case basis. We see them as a useful tool for facilitating engagement with the borrower, and for encouraging better disclosure on ESG,” she said.

Beyond traditional ESG finance, the market is rapidly moving into two areas – transition finance, enabling carbon-intensive industries to decarbonise, and nature-based Investment.

Charlotte Pettit, Director of Finance and Operations at Just Climate, said true sustainability efforts should extend beyond reducing emissions to also encompass biodiversity preservation and nature restoration.

But she acknowledged the difficulties in this space, like data scarcity and reliability, as well as the challenges of investing in emerging markets where reporting standards are less robust.

“Information is just not available in the same way that you would expect potentially in North America or Europe,” she said. “We're having to spend more time understanding what's available, working with our partners to be really honest with ourselves and with our LPs about what we can capture.”

The upcoming COP30 in Brazil and increasing focus on nature economics suggest that natural capital will play a growing role. But addressing physical climate risks – such as the resilience of ecosystems, agriculture, and supply chains – requires a broader view than carbon metrics alone, she said.

Regulatory frameworks like the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) will help usher in standardised, verified ESG data and push fund managers and lenders to strengthen their reporting and transparency practices.

And adaptation finance, though currently underdeveloped, holds some potential. As climate risks intensify, financing that supports resilience – such as flood defences, water management, and agricultural adaptation – will become increasingly critical. Governments and insurers are expected to play a vital role in scaling these efforts.

Ultimately, the transition from optional ESG add-ons to integral sustainability strategies reflects a broader transformation in finance – one where value is increasingly measured not just in returns, but in resilience, impact, and long-term sustainability.

Reach out to your relationship team if you wish to discuss this topic further.

Climate and sustainable financing and facilitation represents only a relatively small proportion of our overall financing and facilitation activities. Details of our financing and facilitation activities and associated emissions can be found in the NatWest Group – 2024 Sustainability Report (sections ‘Estimates of financed emissions’ (p.41) and ‘Estimates of facilitated emissions from bond underwriting and syndicated lending’ (p.45).