BNP Paribas has been named 'Investment Bank of the Year for Sustainability-Linked Loans' by The Banker in their 2020 Investment Banking awards. We took the opportunity to discuss the latest developments in sustainability-linked loans (SLLs) with co-heads of Sustainable Finance Markets, Cécile Moitry and Agnès Gourc, and how the SLL has given rise to the sustainability linked bond (SLB).
Our co-heads of Sustainable Finance Markets discuss sustainability-linked loan (SLLs) developments and the creation of sustainability-linked bonds (SLBs).
Why are SLLs a useful innovation to support corporates in their sustainability strategy?Cécile Moitry (CM): Sustainability-linked loans were created in 2017 to encourage companies to be more ambitious in their sustainability targets by reducing their cost of funding based on pre-determined targets and key performance indicators (KPIs). The market has picked up significantly, reaching €229bn (eq.) in the three years since inception.
SLLs are a useful tool provided the borrower has a sustainability strategy in place, with ambitious performance objectives and KPIs, and a trajectory attached to match the maturity of the facility.
A successful SLL must be a collaborative effort between multiple stakeholders and from various parts of the company – not just their finance department, but also their sustainability teams. In addition, different banking experts and potentially third party ESG research agencies are part of the process too. Finally bringing corporate sustainability teams to the discussion is a fundamental positive change to drive the company's sustainability agenda.
Based on your observation, are there sectors more active than others?CM: We've seen SLLs from a wide array of sectors. That's the beauty of SLLs: it can benefit any company from any sector. This has included:
- First biodiversity-linked loan – BNP Paribas acted as sustainability coordinator for Finnish forest bio-industry company, UPM, for its €750 million revolving credit facility (RCF) linked to net positive biodiversity impact metrics and a 65% reduction in CO2 emissions from fuels and purchased electricity.
- The UK Global Banking team has been leading on efforts to embed social impact into finance through SLLs for housing associations and education leaders, and has supported various innovative financings for L&Q, Optivo, Clarion, and Pearson, all of which were linked to either education or childcare targets.
- BNP Paribas FIC teams have supported private equity sector clients through SLLs and in January 2020, Global investment company Eurazeo contracted the first ever-syndicated sustainability-linked loan (SLL) for a private equity firm, with BNP Paribas acting as sole Sustainability Coordinator. This €1.5bn revolver loan refinances a €1bn facility tied to climate and governance targets.
As long as we agree on specific standards, common definitions and transparent guidelines, there are tremendous benefits to SLLs aligning a company's sustainability objectives and financing strategy.
How have standards and guidelines been developed and have we done enough?CM: In Europe the Loan Market Association (LMA) has played a pivotal role in bringing together banks and experts to clearly define SLLs and clarify ambitious KPIs that are relevant to different sectors. Being able to prove objectively that SLLs can have a real impact is essential in building market trust that it is a true instrument and not just a marketing tool.
How has the development of SLLs inspired the creation of SLBs?Agnès Gourc (AG): Sustainability Linked Loans (SLLs) have paved the way for other sustainability-linked financial instruments, including sustainability-linked bonds (SLBs). The KPI-linked mechanism in SLLs has been applied to the bond market in the form of the SLB, helping drive forward moves to embed transparent and credible targets into the bond coupon mechanism.
"Sustainability linked loans (SLLs) have paved the way for other sustainability-linked financial instruments, including sustainability-linked bonds (SLBs)."
SLBs are publicly-traded instruments that bring together borrowers and investors, and tie coupon payments to predefined sustainability KPIs. With public listing comes greater scrutiny. Investors will demand more transparency in the structures, often putting the emphasis on science-based targets, encouraging borrowers to push for more ambitious KPIs and targets as well as proactively publishing more detailed impact reports.
As the SLB market evolves, I believe we will see more innovations in sustainability-linked products. This is a very encouraging development as corporates enlarge their sustainable financing options. This was recently demonstrated when we accompanied CHANEL for its debut €600m sustainability-linked bonds in September 2020, which was linked to ambitious science-based targets that accelerate the company's climate strategy.
We also saw the recent announcement from the European Central Bank to include SLBs with environmental KPIs as eligible collateral within its asset purchase programmes, another signal that these sustainable finance innovations are becoming mainstream.
Read more about the Banker Award wins here: