How sustainability loan programs could help lower costs and interest rates.
October 13, 2020 By Tom Brown
Greenhouse producers that are committed to making measurable progress in energy efficiency and carbon emission reductions may be able to earn a financial reward in the form of lower interest rates. Known as sustainability-linked loans (SLLs), these programs allow financial institutions to support clients in achieving their sustainability goals.
This type of loan category is gathering momentum globally. Initial demand has been coming from European, Asian and American investment-grade companies with a strong commitment to improving their environmental, social and governance (ESG) performance.
The goal of an SLL is to improve a borrower’s sustainability profile by linking credit facilities to sustainability performance targets over a range of categories related to the borrower’s line of business. Examples of sustainable performance targets include energy efficiency, greenhouse gas emissions, renewable energy, water consumption savings, and sustainable farming.
Unlike green bonds or green loans, proceeds from SLLs are not required to be allocated to specific green projects and can be used for general corporate purposes. For greenhouse operators who may be considering changes to their operation, such as facility expansion, off-grid power generation, or new technologies like LED lighting, this new financing option could improve a project proforma.
Credit-worthy companies that have made commitments to reduce energy costs, fossil fuel consumption, carbon intensity of their products or their carbon emissions will want to investigate an SLL. Interest rate reductions frequently range from 3 to10 basis points on a loan, depending on the degree of improvement achieved by an approved borrower.
Bank of Montreal (BMO) issued the country’s first SLL to Maple Leaf Foods, sending a strong message into the market. Companies that seriously address sustainability measures are directly tackling significant business risks. BMO wants to encourage these efforts by translating that lower business risk into lower costs of borrowing.
To receive reduced interest rates, borrowers must clearly communicate their sustainability objectives, setting ambitious and meaningful sustainability performance targets that apply over the lifetime of the loan. Sustainability targets can be internal – defined by the borrower in line with their sustainability strategy – or external – assessed by an independent third-party advisor against external rating criteria. Companies may not necessarily have all the tools to fully implement or report their progress without third party review and ongoing measurement.
John Uhren, head of sustainable finance, products and strategy at BMO highlighted the vital role to be played by independent advisors who can help borrowers verify and report their progress on achieving the targets. Experienced advisors can help their clients develop meaningful energy plans, measure energy use and reduce emissions.
To date, BMO is the only Canadian bank with a structured SLL in place. The Royal Bank of Canada has a Climate Blueprint, the bank’s enterprise climate change strategy to accelerate clean economic growth and to support clients in the transition to a low-carbon economy. Part of the strategy includes providing $100 billion in sustainable financing by 2025.
SLLs provide a tangible financial incentive to credit-worthy borrowers to encourage risk reduction in operations. Financial institutions know that companies performing well socially and environmentally have a reputation for being good financial performers and are likely to emerge more easily from the current economic crisis caused by COVID-19.
Lower operating costs, lower risks, and lower borrowing costs. What is there to not like about SLLs?
Tom Brown is the director of production development for 360 Energy. He can be reached at email@example.com.
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