One positive aspect of this horrific moment is the rise of loans, bonds and other financial instruments linked to sustainability outcomes. In this sense, “sustainability” is broadly defined to include environmental issues as well as social issues. And, more recently, a new sub-category of, yes, pandemic issues.
Indeed, the response to the pandemic is financed in part by bonds designed to finance the development of vaccines or treatments, support health systems battling the epidemic or provide relief efforts, as for cities and counties. facing fiscal challenges due to lost revenue and emergency spending. At the end of May, governments, banks, businesses and others raised just over $ 150 billion globally through the sale of pandemic bonds, according to a BNP Paribas study, as reported the Wall Street Journal.
“These instruments will contribute to the economic recovery of many sectors and will focus on measures with a social vocation targeting specific segments of the population”, recently wrote BBVA, the Spanish multinational of financial services.
When the cost of money is tied to a company’s sustainability performance: Game on.
Pandemic bonds join a growing list of financial instruments related to sustainability that have caught the attention of investors around the world. Bonds alone come in a rainbow of flavors: green bonds, climate bonds, sustainable bonds, social bonds, ESG bonds, blue bonds (related to oceans) and more. Last month, the German company Henkel, which specializes in the chemistry of adhesives, beauty care products and laundry products, issued a “plastic waste reduction bond” to fund projects related to the company’s efforts to reduce packaging waste.
There are, without a doubt, other flavors, with more to come.
And yes, each of these flavors has a more or less specific purpose. Green bonds are used to finance projects and activities that benefit the environment. Sustainable bonds are used to finance projects that bring clear environmental and social benefits. Social ties aim to achieve positive economic results for an identified target population, with a neutral or positive impact on the environment. (The Nasdaq offers definitions and criteria for each type of bond here.)
Whatever the name, the money is pouring in. Last week, Moody’s Investors Service raised its sustainability bond issuance forecast for 2020 to $ 375 billion, a category that includes green, sustainable and social bonds.
Businesses launch with such regularity that it is rarely more topical, except when it is. Some examples from 2020:
- In February, Verizon’s green bond drew orders worth eight times the billion dollars the company was seeking to raise. “In 25 minutes, orders had already passed the billion dollar mark,” said James Gowen, vice president and chief sustainability officer for the company. As of this afternoon, more than 300 investors have ordered more than $ 8 billion in debt.
- Also in February, investment firm Neuberger Berman announced a $ 175 million sustainability-linked corporate revolving credit facility, the first North American financial services company to do so. The loan will be assessed each year against several benchmarks, including whether the company maintains an “A” rating or higher for its ESG integration on each module for which is rated by the Principles for Responsible Investment supported by the United Nations.
- This month, Visa issued its first green bond, totaling $ 500 million, to be used to fund energy efficiency improvements, increased use of renewable energy sources, employee commuting programs, projects efficiency and initiatives that support the United Nations Sustainable Development Goals.
But the big kahuna of bond sales came earlier this month, when Alphabet, the parent company of Google, issued $ 5.75 billion in sustainable bonds, the largest sustainable or green bond ever created. by a company. (It was only part of a larger $ 10 billion bond issue.) The proceeds are intended to fund a long list of initiatives, including energy efficiency, clean energy, green buildings, clean transportation, circular economy products and processes, affordable housing, purchases by black-owned businesses as well as small and medium-sized enterprises, and to support “health organizations, governments and health workers in First line”.
Like a growing number of bonds, Google follows the Green Bond Principles and Social Bond Principles, both promulgated by the International Capital Markets Association.
These are not just links. Sustainability-linked loans – sometimes referred to as ESG-linked loans – are also attracting interest. Last year, issuance of sustainable loans (which includes social and green loans) jumped 168% to $ 122 billion, according to BloombergNEF.
Sustainability Loans may sound similar to the bonds of the same name described above, but they are not. Rather than raising funds for a particular category of projects or initiatives, the proceeds from sustainability loans can be used for general business purposes. However, their interest rate is partly linked to the borrower’s sustainability performance. It requires the borrower to set ambitious and meaningful “sustainability performance goals” and to report regularly – at least once a year – on its progress, ideally with independent verification.
These loans have a built-in pricing mechanism, in which the interest rate drops if the borrower meets their goals; it can increase if the goals are not met.
So far, 80% of sustainability-related loans have been made in Europe, although the practice is growing in other countries.
A company took out a loan for a renewable energy project, the interest rate being linked to the company’s performance in terms of gender equality.
Late last year, building control firm Johnson Controls tied the price of a $ 3 billion line of credit to its ESG performance. The deal was signed by a consortium of 18 major banks, including JPMorgan Chase, Bank of America, Barclays and Citibank. Sustainability performance targets relate to employee safety and the reduction of greenhouse gas emissions from customer projects as well as Johnson Controls’ own operations.
In February, JetBlue Airways announced a sustainability-linked loan agreement with BNP Paribas, the French banking group, modifying an existing $ 550 million line of credit. The interest rate is linked to the airline’s ESG score calculated by Vigeo Eiris, a UK provider of ESG research and services.
In yet another case, a company took out a loan for a renewable energy project, with the interest rate tied to the company’s performance on gender equality, according to Mallory Rutigliano, green finance analyst. and sustainable at the BNEF.
All of this is expected to continue to grow, with no apparent caps, as various types of instruments gain popularity through a combination of pressing issues and hedging against risk.
For example, it’s probably not surprising that in today’s climate of social and racial inequalities, not to mention the pandemic, social ties are currently a burning property. According to S&P Global, “We expect social bonds to emerge as the fastest growing segment of the sustainable debt market in 2020. This contrasts sharply with the rest of the global fixed income market, for which we anticipate a growth. decrease in issue volumes. this year.”
As with any growing market, there is a need to standardize definitions and measurements. But it is inevitable. For now, let’s celebrate the fact that financial institutions are – finally – starting to hold companies accountable in ways that can directly affect their bottom line.
And when the cost of money is tied to a company’s sustainability performance: Game on.
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