OVERVIEW: Sustainability-linked debt products can boost a greener economy


Despite the global disruption caused by the Covid-19 pandemic, the transition to a clean energy economy continues. Tbillions of dollars at stake economic recovery over the next decade will accelerate, and investors are interested in new performance-based sustainability debt (SLD) products, with North America following in the footsteps of Europe.

Leveraging my experience in helping to strategize and structure several major recent transactions using these new instruments, LTC will accelerate this transition as it will appeal to investors who want certainty and results, while providing borrowers more flexibility than green bonds.

Companies that embrace environmental, social and governance (ESG) goals in a meaningful and transparent manner will thrive by avoiding potential litigation and encouraging positive public opinion. Emerging performance-related SLD products are expected to enhance credibility. Moreover, as more financial institutions and businesses take the bandwagon, they will have broader implications than just lending markets.

Standardization for investors

New principles for the obligations related to the sustainable development of the International Association of Capital Markets (ICMA) and for loans linked to the sustainability of the Loan syndication and trade association and their partners, offer standardization to investors interested in progressing towards ESG objectives. These principles can be applied to all types of issuers and all types of financial capital market instruments, according to the ICMA.

These financial products linked to sustainable development offer:

  • Flexibility, so that the product can be used for a wide range of business purposes, as opposed to green bonds and sustainable bonds, the proceeds of which must only be spent to finance or refinance the ESG projects themselves;
  • Incentives, in the form of lower interest rates, as long as the borrower achieves sustainability performance goals that are “material, quantitative, predetermined, ambitious, regularly monitored and externally verified … within a predefined time frame. “; and
  • Reputation enhancements, including disclosures that bolster credibility and support higher ESG ratings.

Although these new principles are voluntary by market players and applied on a case-by-case basis, ICMA says the idea is to go well beyond “business as usual”.

The EU has gone further in regulation, as it has done in other areas such as online privacy. As of July 12, Europe finalized its Taxonomy regulation, which adjusts the criteria by which economic activities are considered environmentally sustainable.

Related rules govern transparency and disclosure, and make sure that low carbon climate initiatives will not harm other ESG objectives. Multinationals operating there must respect these elements of the “European Green New Deal”, even if they are voluntary in the United States for now.

Major players move forward: last year more sustainable debt was issued globally than ever reach 3.5% of all debts issued. According to BloombergNEF, $ 465 billion was raised globally in 2019, up 78% from $ 261.4 billion in 2018.

Most were still in green bonds, earmarked for projects such as renewable energy production or marine habitat conservation, or sustainability bonds that add social goals. But sustainability-related products with more flexible applications, although tied to overall ESG performance, jumped 168% to $ 122 billion. Just two years after their first appearance on the market, LTC represented more than a quarter of the total in 2019.

Investors such as Black rock listen, as do our customers, including Toyota, Starbucks, Pepsi, Nestlé, Verizon, Southern Power and Hannon Armstrong.

Citibank announced on July 29 a new five-year sustainable progress strategy which includes a $ 250 billion “environmental finance target” for global climate solutions, building on its previous goal of $ 100 billion announced in 2015 and completed last year, four years ahead of schedule.

Eligible activities include renewable energy, clean technology, water quality and conservation, sustainable transport, green buildings, energy efficiency, circular economy, agriculture and sustainable land use. . Citi said it “will continue to develop funding structures and seek opportunities to scale up the positive impact in these areas.”

Why is LTC so popular?

LTCs offer a modest price advantage, but flexibility is their most important appeal: A standard business revolving credit facility can be tied to sustainability, so the borrower does not need to affect the product for a specific green activity.

Jet Blue, for example, has put in place a $ 550 million senior secured revolving credit facility to help align its business strategies with sustainability goals such as carbon neutral operations on all markets. domestic flights by offsetting the emissions of its jet fuel.

Yet despite all their flexibility, LTC drives people to achieve results, not just activities. Thus, investors interested in sustainability may be more attracted to the promise of results. Measurements such as target CO2 emissions are familiar. But the cost of financing a wind farm could be linked to gender equality at its developer, for example.

Finally, there is reputation. Last month, Wells Fargo, Goldman Sachs, JPMorgan Chase and Bank of America launched the Center for Climate-Aligned Finance. This is just one recent example of how boards are prioritizing climate-related investments and broader ESG issues. Existing public disclosures, such as annual reports, can help provide verification.

As companies craft a pandemic recovery strategy, many prioritize sustainability. “If there is one lesson to be learned from the Covid-19 pandemic, it is that our economic and physical health and resilience, our environment and our social stability are inextricably linked,” said Peter Babej, CEO of Citi for the Asia-Pacific region. says July 30.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

Mona E. Dajani is Partner and Global Head of Energy and Infrastructure at Pillsbury Winthrop Shaw Pittman LLP. His team of sustainable finance attorneys provides comprehensive legal advice for cutting-edge transactions on all aspects of sustainable finance, including sustainability-related equity and debt facilities, financial services regulation, and ESG and impact investing. global scale.


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