Companies are looking for loans that link repayment costs to ESG performance

Companies contract or replace existing debts with loans whose interest rates rise or fall depending on their degree of compliance with environmental, social and governance (ESG) criteria, The Wall Street Journal reported.

The loan market is growing dramatically, from virtually zero in 2017 to nearly $ 84 billion this year, according to Dealogic data, reported by the Journal.

Loans are not linked to ESG projects per se. Unlike bridging bonds, which companies issue to finance green projects, these are term or revolving loans for capital or operating expenses that companies incur in the normal course of their activities.

Even though they’re not tied to green projects, they let companies put their money where they say it when it comes to matching their ESG rhetoric with their performance.

If they meet the sustainability criteria set in the loan agreement, the interest rate drops; if they don’t, it goes up. The interest rate difference varies depending on the loan agreement, but it tends to be relatively small, perhaps a fraction of a percentage point, the Journal reported.

Concrete evidence

Performance measurement gives companies hard data to show whether or not they take their goals seriously, a concern for the Securities and Exchange Commission, which is considering making ESG reporting mandatory, and activists.

Robert Freedman / CFO Dive, Dealogic data, reported by the WSJ

Critics have denounced the practice of greenwashing, in which companies say the right things about sustainability and other values ​​but fail to back their goals with hard numbers.

“Investors need clarity on how companies will turn their goals into stocks over the next several years,” said Generation Investment Management, an investment firm focused on sustainability, in a report. “The time for celebrating vague and distant goals on net zero or ‘positive nature’ is long past.”

Goal strength

If done right, loans could be a way for businesses to counter the perception of inaction, but loans also raise their own questions. Although companies rely on third-party companies to validate whether or not they are meeting their goals, it is not clear whether the goals themselves are actual goals or just numbers that the companies would have achieved in anyway. the normal course of their activities.

“What we risk is that you set goals that you know are foolproof for you,” Krista Tukiainen, head of research for the nonprofit Climate Bonds initiative, told The Journal.

Cable maker Southwire Company has taken out a $ 1 billion asset-backed loan from a consortium of banks including Wells Fargo.

The company did not disclose pricing details, but said the interest rate was tied to a five-year target to eliminate two types of issuance that are a by-product of its operations.

By making this loan, Wells Fargo hopes to meet its own sustainability goals, which involve lending $ 500 billion over the next 10 years to borrowers who are subject to ESG performance agreements if they do not want to. pay a higher price. rate.

The interest rate paid by Aligned Data Centers, which has a $ 1.25 billion credit facility, goes up or down based on its efforts to use more renewable energy in its data centers, among others. .

Not only does the loan make financial sense, the company’s chief financial officer Anubhav Raj told the Journal, but it’s something his clients seem to want.

“We think it’s attractive to them and helps us win more business,” he said.

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