ESG as a Refinancing Condition: Legal Implications for Restructuring and Corporate Finance

Introduction

Sustainability criteria have evolved from a voluntary commitment into a hard-edged determinant of corporate finance. A company seeking refinancing in a distress situation must now not only overcome its operational and financial difficulties but must simultaneously present a credible ESG transformation. This article examines three key legal issues from an advisory perspective: ESG as a potential dealbreaker in refinancings, the requirements applicable to restructuring concepts, and the liability exposure arising from greenwashing.

ESG as a Dealbreaker in Refinancings

A growing body of opinion holds that companies that are plainly non-compliant with ESG standards can, from the lenders’ perspective, no longer be refinanced, so that ESG risks become a dealbreaker. This shift is regulatory-driven. The successive amendments to the MaRisk (the German Federal Financial Supervisory Authority’s Minimum Requirements for Risk Management) incorporate ESG risks as a distinct risk driver within banks’ internal risk management, and the institutions in turn pass this pressure on to their borrowers. That said, a more nuanced approach is emerging. Drawing on established practice for restructuring opinions, a vetted plan for achieving ESG compliance may suffice to support a refinancing, provided that attainment of its targets is evidenced through ongoing reporting. We regard this analogy to the going-concern assessment as the most defensible approach. It is not the current state of affairs that determines financeability, but the robustness of a coherent transformation path. So long as, in the absence of binding standards, ESG criteria cannot be translated into individual business models, considerable interpretive latitude remains. For advisory purposes, the decisive question is therefore less whether a company is already ESG-compliant than how persuasively it sets out its path to compliance.

Requirements for the Restructuring Concept

ESG considerations form an integral part of any robust restructuring concept. In its updated form, the IDW S6 standard (the restructuring opinion standard issued by the Institute of Public Auditors in Germany) now expressly captures environmental, social and governance requirements and because banks will as a rule support a restructuring process only on that basis, the ESG analysis becomes a de facto precondition for lender support of the restructuring. A sound opinion must assess the current position, identify the financing, reputational, regulatory and operational risks, and define a realistic target state. What is critical is its integration with the consolidated financial plan. The investment required for the ESG transition must already be reflected in the financing requirement. Otherwise a funding gap arises that jeopardises the positive going-concern prognosis.

In practice, the time factor can be underestimated. Lenders typically become involved only upon a covenant breach or the expiry of facilities. A company that only then begins its ESG analysis will lack the time needed to develop a robust target state. We therefore recommend treating the ESG dimension from the outset as part of early crisis detection. It should further be noted that conventional instruments reach their limits where a comprehensive realignment of the business model becomes necessary. In such cases, the traditional allocation of risk between shareholders and existing lenders must be recalibrated.

Of growing importance in this context is the recent case law of the German Federal Court of Justice (Bundesgerichtshof) on reliance protection in respect of restructuring concepts. Under this jurisprudence, the recipient of payments may rely on a restructuring concept that has been disclosed to it, without being obliged to monitor its ongoing implementation, thereby further curtailing avoidance (clawback) risk under insolvency law. Precisely because restructuring concepts become more complex and time-consuming once the ESG dimension is factored in, the reliability of a coherently documented concept is a value in its own right. It protects the participating lenders in any subsequent insolvency proceedings and thereby lowers the threshold for supporting an ESG-driven restructuring at all.

Greenwashing as a Liability Risk

The newfound significance of ESG generates a corresponding liability risk. Greenwashing is a current enforcement topic. BaFin (the German Federal Financial Supervisory Authority) and the ECB are intensifying their supervision, and the first sanctions proceedings demonstrate that enforcement is being taken seriously. Companies that overstate their sustainability performance risk reputational damage, regulatory sanctions and civil liability. This risk is heightened where ambitious ESG targets are communicated in order to secure refinancing. Since, in the absence of binding standards, a self-prepared rating is also a permissible option, and since there currently appears to be no legal basis for any obligation to engage a third-party provider, responsibility for the reliability of the statements shifts entirely onto the company. Every sustainability statement made public should therefore be documented so as to withstand subsequent scrutiny in the event of a dispute.

Conclusion

ESG compliance has become an essential component of sustainable restructuring capability. For companies in distress, it follows that ESG risks must be analysed early, translated into a robust target state, and that the resulting investment requirements must be built into the financing plan from the very beginning. We regard ESG in restructuring as less an additional hurdle than a structuring task. What is decisive is not an unblemished starting position, but a transformation path that is compelling in both legal and commercial terms while keeping in view the liability exposure arising from overstated sustainability claims. The quality of this preparation will increasingly co-determine the success of restructuring projects.