Looking back at five remarkable innovations in sustainable finance this year, growing the toolkit of financial incentives for ESG action.
Pearson: First-ever sustainability-linked loan in the education sectorFor companies seeking to align their financing to their environmental, social and governance goals, sustainability-linked loans (SLLs) are quickly emerging as a funding solution. In Europe, lending volume increased from zero to €40 billion between 2016 and 2018. They consist in a loan facility – usually a Revolving Credit Facility (RCF) or otherwise another form of loan – with a pricing mechanism linked to an agreed key performance indicator (KPI) related to the borrower's overall ESG performance and strategy.
Education giant Pearson, aims to have a direct relationship with millions of lifelong learners through enabling effective teaching at scale, powered by technology. In March 2019, Pearson announced its first SLL, raising $1.19bn with BNP Paribas acting as Sustainability Coordinator. Closely linked to UN SDG 4 – "Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all" – the transaction marks a key milestone as the first-ever education-linked SLL, with the interest rate dependent on their learning programme enrolment rates.
Laetitia Girolami-Boyer, Sustainable Finance Director at BNP Paribas, believes the Pearson transaction is an excellent example of how to deploy SLLs with internal ESG KPIs. "These could be CO2 emissions, number of women in management positions or, in Pearson's case, the enrolment in vocational training programs," she explains. "With the capacity to tailor the approach to the borrower, SLLs can be deployed across multiple sectors – housing & construction, hospitality, chemicals, utilities, consumer goods, to name but a few." With the number of companies incorporating ESG in their strategy growing rapidly, Girolami-Boyer believes the demand for SLLs is growing so fast that it will not be long before they become mainstream."
Másmóvil: First ever SLL in leveraged loan format – and first SLL linked to S&P ESG EvaluationIn July 2019, Másmóvil, Spain's fourth-largest telecoms operator, issued the first SLL to include an ESG component in a leveraged loan package, with BNP Paribas as sole Sustainability Coordinator. Leveraged loans typically carry a higher risk of default, reflected in higher interest rates compared to investment-grade loans. Unlike Pearson, here the margin is linked to the borrower's ESG rating provided by S&P Global.
The €1.7 billion financing package consists of a €100 million RCF and a €150 million capex line with interest rates tied to Másmóvil'sS&P ESG Evaluation score, which stood at 67/100 in July 2019. It will serve as the initial benchmark for determining annual changes in the interest rate on both the capex facility and the RCF. If the ESG score deteriorates, the interest rate on the loan will rise by 15 basis points; if it improves, the rate will decrease by 15 basis points.
The benefits of SLLs for companies are not only the economic incentives to align their CSR strategy with financing, but also the increasing demand from investors for this new type of ESG rating – credit committees strongly value the transparency of ESG strategy and analysis. The main risk for the borrower is if it fails to reach the KPI in question, thereby triggering a hike in the interest margin. Nonetheless, this financial incentive to achieve sustainability targets embeds trust from both consumers and employees that a company is operating sustainably.
<[a href="https://twitter.com/hashtag/OurclientsinMotion?src=hash&ref_src=twsrc%5Etfw">#OurclientsinMotion] Very happy to announce our first ever #sustainability -linked leveraged loan with @grupomasmovil . Watch the video to learn more: pic.twitter.com/sVUKisPRIS— BNP Paribas CIB (@BNPParibasCIB) 24 May 2019
Enel: First-ever SDG-linked bondWorldwide issuance of green bonds is likely to reach $200 billion in 2019, with China alone accounting for 20% of the total. Having launched several green bonds in the past, Italian energy group Enel knows the market well. In September 2019, Enel took sustainable capital markets to the next level and announced an innovative SDG-linked bond. Unlike green bonds, the proceeds raised are not earmarked for specific use – but the coupon can step up depending on specified KPIs. While inspired by the SLL market, it was the first time such a mechanism was used for a public bond.
" It is time for a new approach that is effective and scalable. In 2020, to meet the targets of the Paris Accord, BNP Paribas encourages every industry to become greener, and is committed to providing concrete financial support for all transition journeys. "
In its five-year SDG-linked bond issued in USD, raising $1.5 billion, Enel commits to enhancing its renewable energy installed capacity to at least 55% (from 46% as of H1 2019) of total capacity by the end of 2021. This KPI addresses four SDGs: SDG 7 (affordable and clean energy), SDG 13 (climate action), SDG 4 (quality education), and SDG 8 (a right to decent work). There is a one-time review of the KPI during the lifetime of the bond by Ernst & Youngat the end of 2021. Should the objective not be met, the coupon – the annual interest payment to bondholders – will step up by 25 basis points.
In October, Enel followed up the worldwide SDG-linked bond debut with a second, but this time in EUR, a €2.5 billion triple-tranche transaction. The 15-year tranche is tagged to SDG 13 (climate change), with a one-time review of a new KPI: Enel's Scope 1 greenhouse gas emissions being equal to or below 125 g/kWheq as of 31 December 2030 (Science Based Target reviewed by DNV GL). The other two tranches relate to SDG 7, "affordable and clean energy".
"Enel's innovative transaction is a game changer for the sustainable bond market," believes Agnès Gourc, Co-Head of Sustainable Finance Markets at BNP Paribas. "We expect it to pave the way for many more transactions which will shape the sustainable bond market of the future."
Siemens Gamesa: First-ever FX hedging facility linked to ESG ratingIn October 2019, Spanish energy engineering company Siemens Gamesa announced a pioneering €174 million FX hedging mandate linked to its RobecoSAM ESG score. The first of its kind, the transaction helps to reduce its currency exposure to its sales of offshore wind turbines in Taiwan, while embedding an ESG KPI into the rate.
Failure to reach its annual target ESG score will entail a sustainability premium, which BNP Paribas has committed to reinvest in forestry projects. In this way, not only does BNP Paribas actively hedge its FX risk, it also simultaneously supports the UN SDGs with concrete climate action.
For Delphine Queniart, Deputy Head of Global Sustainable Finance & Solutions for Global Markets and Securities Services at BNP Paribas, this deal demonstrates how financial innovation can support sustainability outcomes. "It is about creating the right incentives – and ensuring everyone's interests are aligned", she explains. "We must think outside the box and go beyond the realm of the financial ecosystem, to really understand how we can collaborate with our clients, sustainability experts and communities to create tangible positive impact. This deal demonstrates how financial innovation can support sustainability outcomes."
Lenzing: BNP Paribas' first-ever Sustainable SchuldscheinIn November 2019, Austrian company Lenzing AG, the leading producer of wood-based cellulose fibres, announced it was one of the first companies worldwide to issue a Schuldschein linked to its sustainability performance, for €500 million. The Schuldschein is a traditional German floating or fixed-rate debt instrument.
Lenzing's key sustainability goals include reducing sulphur and CO2 emissions, cutting waste water pollution, implementing environmental protection solutions, and verifying the sustainability of suppliers by introducing a new environmental check module. Lenzing's performance against these goals is reviewed annually by MSCI, an independent sustainability rating agency. The KPI results could trigger a fluctuation of the margin by +/- 2.5 basis points. Should the rating improve, Lenzing will donate the margin savings to a charitable project.
Raoul Heßling, Loan and Schuldschein Syndicate at BNP Paribas, describes how we have seen completely new Sustainable Schuldschein structures this year: "Whilst in the past issuers committed themselves to invest certain amounts into green projects, which were the basis for Green Schuldschein, in 2019 we have seen the first ever ESG-linked Schuldscheine where the margin was linked to the sustainability rating." He adds that these structures open the field of Sustainable Schuldschein to a whole new world of issuers that are working on their footprint but cannot demonstrate investments of hundreds of millions into green projects as would be required for Green Schuldschein. Heßling conludes: "Lenzing is the largest transaction of its kind ever done, and we were delighted to be a Bookrunner and more importantly Sustainability Coordinator on it."
What's next for sustainable finance?It is time for a new approach that is effective and scalable. In 2020, to meet the targets of the Paris Accord, BNP Paribas encourages every industry to become greener, and is committed to providing concrete financial support for all transition journeys. Transition bonds look particularly promising to help brown industries – such as the gas, mining, cement and agriculture sectors – become more sustainable, produce less carbon and waste, and/or improve social wellbeing through fair labour and workplace practices.
To meet these challenges, BNP Paribas has announced the creation of a Sustainable Finance Markets team within CIB, bringing together three teams of experts to offer solutions across the debt financing spectrum. The new team is co-headed by Agnès Gourc and Cécile Moitry. "Sustainability is central to all the discussions with our clients today and this new set-up will allow us to comprehensively address our clients' needs," they explain. "We are already starting from a very strong position and our joined forces within the Sustainable Finance Markets team will take BNP Paribas' sustainable finance franchise to the next level."