Faced with environmental protection pressure from investors and regulators, more and more companies are linking corporate lending rates to environmental and other sustainability goals.
Sustainability-linked loans have interest rates that are adjusted based on whether a company is meeting certain environmental, social or governance goals, such as reducing carbon emissions. According to data provider DeLogic, as of September 16, US companies had raised $83.8 billion in such loans, up from $2.5 billion in the same period in 2020. According to Dealogic, US corporate debt, including sustainability-related loans, amounted to $1.7 trillion as of September 16.
Loans that include everyday financial products such as revolving credit facilities and term loans allow financial executives to potentially reduce interest rate costs and demonstrate their commitment to sustainability to investors, customers and employees. ..
According to officials, targets that are usually based on internal ESG targets or external sustainability assessments are considered both financially significant and achievable. Unlike green bonds, which raise money for a particular project, companies have flexibility in how they use their debt and usually have maturities of several years.
In recent years, corporate lending related to sustainability initiatives has skyrocketed. In addition to stability-related debt, revenue for ESG-labeled US corporate bonds so far in 2021 increased to $162.9 billion, compared to $100.5 billion in the same period in 2020 and $44.3 billion in 2019.
Growth in these bonds and loans takes place in the absence of global stability standards. US securities regulators are considering mandating climate-related reporting requirements as investors pressure companies to demonstrate what they are doing to protect the environment.
Tobacco Company Philip Morris International Ltd.
Chief Financial Officer Emmanuel Babo said he had previously been discussing debt acquisitions related to sustainability with the bank. He said the loan will replace the revolving credit facility and the same could be announced this month. The company declined to comment on the size and price of the loan.
In August, Philip Morris launched a funding framework with two goals for use in sustainability-linked loans. Heat the tobacco without burning it. The company claims that it is less harmful to smokers than traditional tobacco. This metric was 23.8% in the 2020 calendar year. The company plans to sell these products in 64 markets by December 31 and in 100 markets by the end of 2025.
Philip Morris reported net sales of about $7.59 billion for the period ended June 30, an increase of about 14% year-over-year. Net income was $2.17 billion, up about 12%.
“Everything we do, including how we raise money for the company, we have the ambition to be a non-smoking company at the center of our work,” Mr. Babo said.
Sustainability-linked loan interest rates often rise or fall by a few percentage points, depending on whether the company failed to reach its goals. Companies typically rely on third-party companies to assess their progress toward self-established metrics each year.
As of now, the number of companies paying higher interest rates for failing to meet their targets is unknown, according to finance and sustainability officials, this information needs to be disclosed.
Wells Fargo is one of several major banks that offer sustainability-linked loans. David Marks, head of commercial capital business at Wells Fargo & Company, said:
Wells Fargo, in collaboration with other banks, last month arranged a five-year, $1 billion asset-backed loan with cable maker Southwire. The rates are linked to the goal of eliminating so-called Scope 1 and Scope 2 emissions from their operations and purchased energy by 2025.
A spokesman said Wells Fargo expects some of Southwire’s loans to count toward the bank’s goal of developing $500 billion in sustainable financing by 2030.
Krista Tukianen, head of research at the non-profit Climate Bonds Initiative, finds it difficult to determine whether the loan will encourage companies to set ambitious goals or reward them for achieving something. said.
“The risk we take is to set goals that you know are absolutely certain for you,” Tukianen said.
Allied Data Centers LLC, a Dallas-based technology infrastructure company, increased the size of its sustainability-linked credit facility from $1 billion it closed last September to $1.25 billion in July. Down. Chief Financial Officer Anubhav Raj said the company’s goals include increasing the use of renewable energy in data centers, conducting regular ESG assessments and ensuring worker safety at construction sites. where did it go.
Raj said the company has decided to take the stability-linked loan as it makes financial sense. He declined to share pricing details. The loan also helps Allied demonstrate its ESG commitments to customers, including large technology companies.
“We think it’s attractive to them and helps them win more business,” he said.
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