Last week, Apple issued $ 2.2 billion in green bonds, bringing its total to $ 4.7 billion to date – and thus consolidating its status as the leading issuer of corporate green bonds in the United States – United.
But green bond growth has actually slowed down after five meteoric years, seemingly giving way to new sustainability-linked loans with looser requirements.
On the one hand, the emergence of these new types of loans is diversifying the global green finance market and expanding access to companies that may not have qualified for green bonds. On the other hand, the trend concerns some who believe that the different green finance options may fall victim to the same greenwashing that has affected other aspects of sustainable businesses.
The distinction between bonds and loans helps to illuminate the challenges and opportunities associated with each: Bonds tie funds to specific types of investments, in this case, those with beneficial results for the environment. The loan funds can be used for general purposes. Sustainability loans tie interest rates to the sustainability performance goals (SPTs) that the borrower is expected to achieve.
Consider the following examples, the first of a green bond and the second of a sustainability loan, for comparison:
- PepsiCo announcement in mid-October, it had priced its first green bond, the $ 1 billion of which will finance a series of sustainability projects related to plastics and packaging, decarbonization of operations and the chain. supply, and water.
- In July, Spain’s fourth telecommunications operator, MásMóvil, announced Posted a package of loans linked to sustainability. The environmental, social and governance (ESG) rating assigned to MásMóvil this month by S&P Global Ratings served as an initial benchmark for determining interest rate changes on the $ 110 million revolving credit facility. and the $ 165 million capital expenditure line.
The need for transparency and effective sustainability-related disclosure practices to avoid ‘ESG laundering’ is crucial for the growth of the sustainability-related lending market.
Sustainable development loans can be attractive for several reasons. Companies that adhere to SPT in their loan agreement can often obtain more favorable terms than those available under conventional loans.
For lenders, S&P Global Ratings reports that some empirical evidence suggests a link between strong performance on ESG factors and improved financial performance of companies and returns on investment. Essentially, lenders can rationally bet on a better run business.
The sustainable debt market and the risk of greenwashing
According to BloombergNEF data (BNEF), total sustainable debt issuance topped $ 1 trillion in 2019, in what BNEF called a “historic moment for the market”.
BNEF attributes the increase in capital flows to increasing investor demand for these types of securities. Green bonds, which debuted in 2007, remain the most mature instrument in the sustainable debt market with $ 788 billion in total issuance to date. Sustainability-related loans, which only appeared on the market in 2017, have grown massively to reach $ 108 billion in total issuance to date.
To be clear, BNEF numbers do not reflect Apple’s November 7 announcement a $ 2.2 billion green bond offering. Previous issues of Apple have focused largely on investments in renewable energy. The latter will support global initiatives to reduce emissions from its operations and products.
The observation by the BNEF of the growing demand from investors invites further reflection. Euromoney Associate Editor Louise Bowman wrote a full assessment of the green bond market in which she noted that issuers, wary of the cost and complexity of green bonds, are reluctant to sell them. Bowman warns that non-green issuers may be too ready to fill the resulting void, raising the specter of greenwashing.
Indeed, the accusations of greenwashing recently appeared (PDF) in reference to a $ 150 million green bond financing for Norwegian shipping company Teekay Shuttle Tankers to finance four new energy efficient tankers.
The project is expected to save more carbon dioxide emissions than any Tesla car on Norwegian roads, with each new tanker producing 47% less annual emissions than other tankers operating in the North Sea. Nonetheless, the bond was reduced to $ 125 million after investors raised concerns that Teekay allows the extraction and transportation of fossil fuels.
“The need for transparency and effective sustainability-related disclosure practices to avoid ‘ESG clean-up’ is crucial to developing the sustainability loan market and the practice of linking loan pricing to ESG performance,” said said Michael Wilkins, Head of Sustainable Finance at S&P Global Ratings.
Some verification and standard setting mechanisms have already emerged, including the Green Loan Principles promulgated in March 2018. On the basis of these principles, the Principles of sustainable development loans (PDF) (SLLP) were launched in March. The framework consists of four main components:
- How a sustainability-linked loan product should fit into the borrower’s broader corporate responsibility strategy;
- How to define sufficiently ambitious SPTs for each transaction;
- Practices for reporting progress in achieving SPTs; and
- The value of using a third party to review and verify a borrower’s performance against their SPTs.
Some empirical evidence suggests a link between strong performance on ESG factors and improved financial performance of companies and returns on investment.
After this last element, the proliferation of loans linked to sustainability is also stimulating ESG rating agencies such as Sustainalytics and Vigeo Eiris, which have long assessed the ESG performance of companies on various key performance indicators. Indeed, the very first loan linked to sustainable development in 2017 led by ING and Philips linked interest rates to the Philips ESG rating of Sustainalytics.
A September S&P Global Ratings report highlights concerns about “self-reported and unaudited performance data as well as self-regulated and self-determined goals for sustainability labeling,” noting that investors could be deterred from a market where the borrower may misreport performance. Of course, S&P Global Ratings provides ESG rating services, so it has a clear interest in promoting third party insurance. Nevertheless, the point remains solid.
On the same theme, S&P Global Ratings warns that investors could be turned off by a market where “a variety of company-specific goals could make benchmarking difficult.”
Interestingly, an October Reuters article notes that the same problem exists among third-party ESG rating agencies, which, unlike credit rating agencies, are also difficult to compare due to a lack of standardization. “Regulation may be necessary,” the article notes, “to create the certification and compliance that will facilitate and expedite analysis.”
Whether insurance mechanisms are ultimately defined by regulators or by the market, the sustainability lending market is sure to benefit from a strong SPT framework, assessment and disclosure. If properly structured, the market is likely to continue to grow and improve the ESG performance of companies in the process.