Credit loans

More CFOs Add Sustainability Goals to Business Lending

In the face of pressure from investors and regulators to protect the environment, more and more companies are linking corporate loan rates to environmental and other sustainability goals.

Sustainable development loans carry interest rates that are adjusted depending on whether a company meets certain environmental, social or governance objectives, such as reducing carbon emissions. As of Sept. 16, U.S. companies had raised $ 83.8 billion in loans, up from $ 2.5 billion during the same period in 2020, according to data provider Dealogic. According to Dealogic, the amount of loans to US businesses, including sustainability loans, was $ 1.7 trillion as of September 16.

Loans that include mainstream financial products such as revolving credit facilities and term loans allow financial agents to potentially lower interest rate costs and show investors, customers and employees their commitment to sustainability. . ..

According to executives, goals that are generally based on internal ESG goals or external sustainability assessments are seen as both financially significant and achievable. Unlike green bonds, which raise money for a particular project, companies have flexibility in how they use their loans and typically have a maturity of several years.

In recent years, business loans related to sustainability initiatives have exploded. In addition to sustainability-related loans, income from ESG-labeled U.S. corporate bonds so far in 2021, up from $ 100.5 billion over the same period in 2020 and $ 44.3 billion in 2019 Increased to $ 162.9 billion.

The increase in these bonds and loans occurs in the absence of global sustainability standards. U.S. securities regulators are considering imposing climate-related reporting requirements as investors pressure companies to demonstrate what they are doing to protect the environment.

Tobacco Company Philip Morris International Ltd.

CFO Emmanuel Babo said he was discussing the first sustainability-related loan acquisition with the bank. The loan will replace the revolving credit facility and could be announced this month, he said. The company declined to comment on the amount and price of the loan.

In August, Philip Morris launched a financing framework with two goals for use in sustainability-linked lending. 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 calendar year 2020. The company also wants to sell these products in 100 markets from 64 to December 31 through the end of 2025.

Philip Morris had net sales of about $ 7.59 billion in the period ending June 30, an increase of about 14% year-over-year. Net profit rose to $ 2.17 billion, up about 12%.

Anubhav Raj, CFO of Aligned Data Centers.

Photo:
Data Centers Aligned LLC

“In everything we do, including how we fundraise for the business, we have the ambition to be a smoke-free company at the heart of our work,” Mr. Babo said.

Interest rates on sustainability loans often rise or fall by a few percentage points, depending on whether or not the business has met its goals. Companies typically rely on third-party companies each year to assess their progress toward self-determined metrics.

So far, the number of companies that have paid high interest rates for not meeting their targets is unknown, given the need to disclose this information, according to finance and sustainability officials.

Wells Fargo is one of several leading banks offering sustainability loans. David Marks, head of commercial capital activities at Wells Fargo and Company, said:

Wells Fargo, together with other banks, arranged a five-year, $ 1 billion asset-backed loan with cable operator Southwire last month. The tariffs are linked to the goal of eliminating so-called Scope 1 and Scope 2 emissions from their operations and purchased energy by 2025.

Wells Fargo expects a portion of Southwire’s loans to count toward the bank‘s goal of developing $ 500 billion in sustainable financing by 2030, a spokesperson said.

Krista Tukiainen, head of research at the nonprofit Climate Bonds initiative, struggles to determine whether a loan will encourage companies to set lofty goals or reward something they might have achieved. Noted.

“What we’re risking is setting goals that you know are absolutely certain for you,” Tukiainen said.

Aligned Data Centers LLC, a Dallas-based technology infrastructure company, increased the size of its $ 1 billion sustainability credit facility, which closed last September, to $ 1.25 billion in July . low. The company’s goals include increasing the use of renewable energy in data centers, performing regular ESG assessments and ensuring the safety of workers on construction sites, said CFO Anubhav. Raj. Declared.

The company decided to take out a sustainability loan because it makes financial sense, Raj said. He declined to share pricing details. The loan also helps Aligned show its ESG commitments to its clients, including large tech companies.

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

Write to Kristin Broughton at [email protected]

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