Scaling Corporate Sustainability: Innovations In Sustainability-Linked Loans At Brookfield Renewable Partners, International Seaways, WSP Global, And Neuberger Berman
February 18, 2020
2020 has been busy for North American sustainability-linked loans with many firsts. Following previous sustainability-linked loan developments in Europe, US volume more than quadrupled to $18bn in 2019 from $4 billion in 2018 while global volume nearly tripled to $113 billion from $48 billion.
This momentum is noteworthy because sustainability-linked debt—which links the borrower’s achievement of predetermined sustainability performance targets to the financing rate—has the potential to scale sustainability beyond the less than 2% of global fixed income issuance that green bonds represent. More broadly, unlike green bonds, which fund projects with environmental and/or climate benefit, sustainability-linked debt is not contractually limited to a green use of proceeds. Sustainability-linked debt allows a range of issuers, including those with a high carbon footprint, to further dedicate themselves to their sustainability strategies. In addition, for companies with particularly sustainable strategies and business models, innovative general corporate purpose financing products that create financial incentives for the company to fulfill its sustainable business model are more scalable way to drive the sustainability of capital markets. Green bonds, first issued in 2007, hit a record $255 billion in issuance in 2019 according to Climate Bonds Initiative. Sustainability-linked debt—pioneered by Philipps in 2017 and already at $113 billion—should have a more rapid growth trajectory.
Brookfield Renewable Partners: Sustainability-Linked Revolving Credit Facility
Brookfield Renewable Partners (TSX: BEP.UN; NYSE: BEP), one of the world’s largest investors in renewable power and a leader in the decarbonization of the global power generation grid, is an example of a company with a sustainable business model using sustainability-linked debt. Brookfield Renewable Partners operates one of the largest publicly-traded renewable power platforms, which includes hydroelectric, wind, solar and storage facilities in North America, South America, Europe and Asia. On January 6th, Brookfield Renewable Partners closed one of the first sustainability-linked loans offered in Canada with BNP Paribas. This revolving credit facility includes a pricing incentive that reduces Brookfield Renewable Partners’ cost of debt as it expands renewable and clean electricity generating capacity and meets predetermined CO2 emissions avoidance levels.
International Seaways: Sustainability-Linked Senior Secured Term Loan and Revolving Credit Facility
International Seaways (NYSE:INSW), one of the largest crude oil and petroleum product tanker companies, is an example of a company leveraging sustainability-linked loans as it pursues industry-wide sustainability goals. On January 28th, International Seaways announced that it had closed on $390 million of sustainability-linked credit facilities. The facilities consist of a 5-year $300 million senior secured term loan facility; a 5-year $40 million revolving credit facility; and a 2.5-year $50 million senior secured term loan credit facility. The two 5-year facilities, which represent 87% of the borrowing, include a sustainability-linked pricing mechanism—a first for a NYSE-listed ship owner and operator—that has been certified by an independent environmental, social, governance (ESG) firm as meeting Sustainability Linked Loan Principles. The facilities’ pricing will adjust based on annual reductions in CO2 emissions in line with the International Maritime Organization’s target of a 50% reduction in greenhouse gas (GHG) emissions by 2050. The key performance indicators (KPIs) are calculated according to the Poseidon Principles, a global framework for assessing the climate alignment of ship finance portfolios.
WSP Global: Sustainability-Linked Syndicated Revolving Credit Facility With Environmental and Social Performance Targets
WSP Global Inc. (TSX: WSP), a leading Canadian engineering and design services firm, is an example of a company incentivizing its own sustainability by incorporating both environmentally- and socially-linked incentives into existing debt. On February 4th, WSP Global announced that it amended a $1.2 billion four-year revolving credit facility with BNP Paribas to include an annual pricing adjustment up or down based on achieving three sustainability performance targets: (i) lower GHG emissions across global operations; (ii) higher proportion of revenues from services with a positive environmental impact; and (iii) higher share of management positions held by women. WSP is the first professional services firm in the Americas that incorporated sustainability-linked terms in its syndicated credit facility. Canadian Imperial Bank of Commerce, National Bank Financial and BMO Capital Markets were joint bookrunners and co-lead arrangers of the facility.
Neuberger Berman: Sustainability-Linked Revolving Credit Facility With Environmental, Social, and Governance Performance Targets
Also on February 4th, Neuberger Berman became the first US asset manager to close a sustainability-linked loan. Neuberger Berman linked pricing of its 5-year $175mn credit facility to ESG goals, such as continuing to achieve at least an A score by the UN-supported Principles for Responsible Investment (PRI), increasing the proportion of equity holdings that it engages with on ESG issues, aligning deferred compensation programs with client portfolios, remaining a private employee-controlled firm, and expanding employee ownership—the single greatest predictor of long-term value creation for asset managers according to FCLTGlobal. Pricing on the loan can increase or decrease by as many as four basis points depending on ESG performance. Mitsubishi UFJ Financial Group led the transaction.
Driving Innovation and Sustainability
An offshoot of green bond popularity, sustainability-linked loans are more scalable due to their greater flexibility on use of proceeds. In tandem with scaling, constructing appropriate and material KPIs for ESG-linked debt products is vital to maximizing environmental and social impact. Sustainability-linked issuers and underwriters can draw inspiration from over 600 ESG frameworks to identify KPIs that align with their business model and sustainability strategy. Some of the more commonly accepted standards and frameworks, such as Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), and Task Force for Climate-Related Financial Disclosure (TCFD), might be particularly useful references when designing KPIs. Sustainability-linked fixed income remains a source for both innovative financial structures and increasing incentives for corporate sustainability.
Bhakti Mirchandani is a Managing Director at FCLTGlobal, where she led research on predicting long-term success for companies and investors. The views that she expresses in this article are her own.
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