The European syndicated loan market is demanding more borrowers seeking financing linked to sustainability. Recent history shows that the bond market is lagging behind the loan market when it comes to financing innovation related to sustainability, suggesting that investors would do well to pay attention to what is happening in the loan market. .
Sustainability-conscious borrowers have started adding KPIs to their transactions. So far, three has been the agreed number that banks have demanded to ensure they can sweep aside any “greenwashing” claim.
But more and more companies want to go further. Last week, Anheuser-Busch InBev signed the largest ever revolving sustainability credit facility, a $ 10.1 billion deal, which had four KPIs attached to the margin.
Some borrowers have reportedly requested five KPIs, especially for larger transactions. The added burden makes sense from a public relations perspective, especially since the organization will already be focusing its operational momentum on meeting environmental, social, and governance goals with three KPIs anyway.
Sustainability Bonds (SLBs) emerged after the lending market pioneered the format. But the adoption of securities in investor portfolios has been rapid and the market is growing. It won’t be long before issuers want to add more KPIs to their SLBs as well.
After years of little happening as issuers and bankers wondered how to present KPIs to investors, Italian utility Enel printed the very first SLB in September 2019.
This agreement had a KPI, based on the production of renewable energy. It worked in part because it was much simpler than the SLB structures that investors had presented before. But a year later, the Swiss pharmaceutical company Novartis set itself two KPIs for his debut in SLB. And last month, Swedish fashion retailer H&M saw blow demand for an agreement linked to sustainable development with three KPIs.
It is difficult to add KPIs to obligations. Typically, issuers have sought to add social and governance KPIs to their transactions in light of the coronavirus pandemic and social movements such as Black Lives Matter.
Bond investors are generally uncomfortable with social and governance indicators compared to environmental indicators. It’s much easier to measure how much polystyrene has been recycled, or what percentage of energy used comes from renewable sources, than it is to judge racial equality on a board of directors.
But the fixed income market has shown that it changes quickly when it comes to sustainability transactions, their public nature means this is a much better public relations opportunity for investors. issuers than the confidential loan market.
It’s only a matter of time before bonds start seeing longer lists of KPIs.