13 Dec 2021
NIB to mainstream sustainability-linked lending
“NIB wants to promote ambitious sustainability transitions and high-quality standards in the fast-growing sustainability-linked loan market,” says Joe Wright, Head of Business Development at NIB.
Environmental lending typically includes two types of loans. Use-of-proceeds loans are earmarked for predefined green assets. A typical example of such activity would be to finance renewable power generation installations. Sustainability-linked loans are aligned with a corporate strategy, creating financial incentives for companies to step up their climate efforts, for example by paying a lower interest rate if sustainability targets are met.
The first sustainability-linked loans arrived in the market in 2017, with cumulative global issuances reaching USD 49 billion by 2018, according to Bloomberg. Cumulative issuances between 2017 and 2020 are around USD 325 billion, and the pace of issuance volumes continues to increase. Between 2017 and October 2021, around two thirds of the 85 sustainability-linked loans issued in NIB’s Nordic and Baltic member countries, have been revolving credit facilities and the remainder have been term loans, according to Bloomberg.
“The sustainability-linked loan type is especially useful for delivering impact based on corporate sustainability transitions more relevant for clients than linking impact to specific assets,” says Wright.
NIB has during 2021 developed its own framework outlining criteria for sustainability-linked lending. This framework, which is still a work in progress, has been partly informed by market practice, the Sustainability-Linked Loan Principles developed by the Loan Syndications and Trading Association, and the Sustainability-Linked Bond Principles developed by the International Capital Market Association, the latter to which NIB’s experts have contributed through various working groups.
Lena Korkea-aho, Senior Environmental Analyst at NIB, says that if sustainability-linked loans are to be effective, it is important that companies have ambitious sustainability strategies and targets, which refer to benchmarks; a credible timeline; and planned measures.
“We need to ensure that the selected targets are really core and material for the client, and that they are ambitious. We´ve observed that defining these targets and levels requires efforts from both us, the lender, and the borrower, in identifying and agreeing on appropriate targets,” says Korkea-aho.
In October, NIB signed its first sustainability-linked loan with Electrolux Professional AB. The seven-year EUR 60 million loan is structured to finance the transition of Electrolux Professional’s (EPRO’s) operations to become more sustainable, contributing to the transition towards a low-carbon economy.
NIB and EPRO agreed on three key performance indicators (KPIs) to be achieved by the end of 2025, with 2019 as a base year. The KPIs are core to EPRO’s sustainability strategy, addressing 1) a climate target related to reducing CO2 emissions and 2) a business-specific target linked to water consumption efficiency in products sold, as well as 3) a decrease of HFC gases in products.
In December, NIB signed an eight-year EUR 100 million sustainability-linked loan with Metso Outotec Oyj related to reducing CO2 emissions the company´s own operations and supply chain by 2025.
Reporting and verification
“We also require third-party verification. It can be as easy as the client providing the key performance indicators, they report on, in their assured annual sustainability reporting. Otherwise, there would have to be a separate third-party verification that the client has achieved the targets,” says Korkea-aho.
“By connecting financing to corporate sustainability strategies, we provide an alternative for clients within sectors that lack green projects but still have great potential for improving their sustainability performance,” Korkea-aho says.
“Sustainability-linked lending requires a lot from both banks and their clients. We have seen varying quality standards in the market with targets that are not sufficiently ambitious or relevant for the company. Our goal is to lead by example in the market, setting high standards, and financing high impact sustainability transitions.”
What is sustainability-linked loans?
Sustainability linked loans encourages borrowers financially to achieve predefined sustainability Key Performance Indicators (KPIs).
Use of funds: General purpose aligned with a corporate strategy
Focus: Impact created by a borrower’s activities and operations
Commitment: Forward looking commitment to a future target
Structure: Financial or structure characteristics adjusted to outcome of performance
Impact: Change in sustainability performance of issuer
Outcome: Monitored with documented sustainability targets of issuer
Financial instruments: Sustainability-linked loans and bonds