How ESG Scores Can Affect the Cost of Credit
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Although this practice is still relatively rare, a growing number of American companies are exploiting a new type of financial package linked to the promise of good performance on their ESG measures: better interest rates on business loans.
In early February, the US subsidiary of Japanese tire maker Bridgestone revealed it had signed a $ 1.1 billion credit facility with Tokyo-based World Bank SMBC with interest rates indexed to risk scores. ESG that it obtains from the rating agencies Sustainalytics and FTSE Russell. The better his ESG scores, the less interest he will pay on the borrowed money. The reverse is also true: if the company exceeds one or more of its ESG goals or slips in a rating, that loan will be more expensive.
The deal, billed as one of the first of its kind for the U.S. tire industry, is known as the Sustainability Loan (SLL). This type of financial instrument first appeared in 2017, and volumes increased 150% between 2018 and 2019 – with more than $ 137 billion in loans drawn by SLLs in 2019, according to a study by Skadden law firm. And although the first half of 2020 slowed with the economic shock of the COVID-19 pandemic, the borrowing volume through October of last year was still 29% higher than for all of 2018.
Companies are exploiting a new type of financial package linked to good ESG performance: better interest rates on business loans.
To date, a majority of SLL business has originated in Europe, but the practice is increasingly common in the United States.Last March, for example, packaging company Crown Holdings closed a $ 3.25 billion SLL with BNP Paribas – one of the biggest SLL loans at the time. The loan is linked to Crown’s Sustainalytics rating.
BNP has also signed agreements with JetBlue Airways, linked to its ratings by Vigeo Elris; and service company WSP Global, which is measured on three parameters: its reduction in GHG emissions, the growth of revenues linked to services beneficial to the environment and an increase in the number of women executives. “We are proud to challenge the status quo by formally linking sustainability and financing,” WSP’s chief financial officer said in a statement.
Power of partners
In December, the Invitation Homes real estate investment trust also stepped in with a $ 3.5 billion credit facility in conjunction with BBVA. Its loan will be adjusted according to the REIT’s score by the Global Real Estate Sustainability Benchmark, or GRESB. “Sustainability is a core skill, more than ever, and we anticipate that the demand for loans like these will only increase as consumers and investors demand full transparency on ESG from companies with whom they do business, ”said BBVA USA President and CEO. Javier Rodriguez Soler, when the deal was announced.
What is the appeal of a CFO or treasurer? Unlike green or sustainable bonds – which refer to money for specific projects related to the transition to a clean and fair economy, such as investments in renewable energy – SLLs can be used for general business purposes.
This difference helps sustainability teams more easily capture the interest of their internal treasury teams, noted Davida Heller, senior vice president of sustainability and ESG for financial services firm Citi, during a GreenBiz 21 session last week. “They realize that by working together on their solutions, they are able to achieve all of their goals,” Heller said, adding, “It’s an internal partnership.”
Jose Anes, vice president and corporate treasurer of Bridgestone Americas, told me that the tire company’s treasury organization has started approaching banks about the role it could play in supporting the global organization’s vision for sustainable development. The idea for this “green gun” arrangement took root, and the finance team huddled with the sustainability team to determine which metrics should matter. “It started with us, as a company, really looking to be responsible and improve scores,” he said.
Bridgestone has certain targets in place for Sustainalytics and FTSE Russell. For example, if Bridgestone’s ESG risk drops to “Negligible” (the lowest possible level and the highest rating Sustainalytics catalogs), it will get a better credit rate. (As of this writing, Bridgestone is at the risk level a cut above.) Its cost of borrowing will be the lowest if it meets the targets of Sustainalytics and FTSE Russell, Anes said. “On the other hand, if our scores get worse, we have skin in the game.”
Bridgestone’s sustainability goals include a commitment to become carbon neutral by 2050, as well as a medium-term goal of reducing its CO2 emissions by 50% by 2030 from 2011 levels. ‘also commits to using “100% sustainable materials” by 2050, with an intermediate target of 40% of its materials coming from renewable or recycled resources.
Anes said the money will be used for general working capital and the installation will last for two years. The aim is to assess performance at expiration and renew it if that makes sense. He already thinks that’s a strong possibility.
“There are definitely the direct benefits we get from our impact and our scores,” noted Anes. “The most important part of this is that it brings increased visibility and accountability.”