Sydney Airport has closed a landmark sustainability-linked loan, a first for Australia and, at A$1.4bn, the largest in Asia Pacific. With BNP Paribas and ANZ acting as joint bookrunners and sustainability coordinators, the deal heralds a new era in innovative sustainable finance in the region.
This transaction achieved a number of firsts:
- The first syndicated SLL in Australia
- The largest transaction of its kind in Asia Pacific
- The largest SLL for any airport worldwide
The interest Sydney Airport will pay on the loan will depend on an annual assessment of the firm's overall environmental, social and governance (ESG) risk rating by Sustainalytics, a global leader in ESG research and ratings. As a holistic performance measure, Sydney Airport will therefore have a financial incentive to improve its headline ESG score.
The transaction is aligned with the new Sustainability-Linked Loan Principles published by the Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) in March 2019. BNP Paribas and ANZ were mandated joint bookrunners and sustainability coordinators, attracting over 10 lenders.
Sustainable loans take flightThis transaction reinforces a growing appetite for sustainable lending in the corporate and finance communities. As a funding instrument, SLLs' innovative financing approach has attracted increasing attention from corporate CFOs, treasurers and their sustainability teams and sustainability-focused lenders due to their flexibility. To date there have been over US$75 billion of SLLs close since their emergence in 2017, according to the Bloomberg NEF Sustainable Debt Investment & Valuation.
Unlike green bonds and green loans, whose proceeds are targeted at specified green projects or capex, financing raised from SLLs are used for general corporate purposes. Under the terms of an SLL, the margin on the loan will vary depending on the borrower's ability to meet pre-set environmental, social and governance (ESG) performance targets: by meeting these targets, the borrower will pay a lower margin.
This incentive structure means SLLs are available to a much broader range of corporate borrowers, which may not otherwise have the capex needs of sufficient scale to support the other green finance options available – but nonetheless have a clear and ambitious ESG agenda. SLLs provide not only a financial incentive for ESG improvement but can also serve to justify investment in measures to improve ESG performance, whether through internal processes and reporting, specific initiatives or capital expenditure. Given the large size of general corporate purpose facilities, SLLs can be highly beneficial.
"Green bonds and loans need to identify investments and capex to support the green designation so there are scale restrictions," explains Chris Ruffa, Managing Director for Energy & Infrastructure, Investment Banking Asia Pacific, at BNP Paribas. "Taking these out of the equation, SLLs will have significant applications and serve as an important complement to green finance in satisfying issuer and investor demand for sustainable finance."
High flyersIn reaching for the skies, Sydney Airport's pioneering spirit is helping to bolster interest in sustainable lending from other borrowers in Australia and across Asia Pacific, while others in the transport sector may also take note. Sydney Airport has long been an ESG high flyer for a few years. Its efforts have earned it high ratings from sustainability rating agencies, ranking seventh globally in the Dow Jones Sustainability Index in 2019, while it received its Level 3 'Optimisation' under the Airport Carbon Accreditation programme in 2017. The airport remains committed to achieving carbon neutrality by 2025 and plans to reduce carbon emissions per passenger by 50 percent from 2010 levels by 2025.
"Sustainability-linked loans are a powerful financing tool that helps to support our clients in advancing their sustainability strategy across clear, quantifiable ESG objectives," says Noemie Peiffer, Vice President for Energy Natural Resources Projects and Export, Investment Banking Asia Pacific at BNP Paribas. "They help translate the UN SDGs into concrete, measurable action."