Improvement the next chapter in sustainability
ING is the pioneer of the sustainability performance-linked loan (SPL) globally. Leonie Schreve, Amsterdam-based global head of sustainable finance, and Herry Cho, Singapore-based head of sustainable finance, Asia Pacific at ING, give KangaNews the lowdown on the nascent asset class.
A good place to start is on the relative evolution of green loans and SPLs. How big are the markets relative to each other and what is the potential for each?
The initial interest came from firms which already score very highly in sustainability aspects, such as Koninklijke Phillips. However, greater demand now comes from companies that view themselves as being in a challenged sector but for which sustainability issues are important. This type of company is eager to make a firm commitment around sustainability.
Engagement is increasing not so much because a potentially lower margin is one of the advantages of the SPL product but because it demonstrates a serious commitment to change. It is a simple but powerful concept for a company to meet its sustainability ambitions and these are not easy targets to reach as we set the bar high. The upside is potentially a discount on the margin, but on the other hand clients are willing to pay a penalty if their sustainability performance falls.
There is considerable interest in SPL product in Asia, in part because it is focused on transition and improvement. It really does not matter where a company is as a starting point, provided there is a demonstrable, material improvement in overall environmental, social and governance (ESG) direction.
The Loan Market Association (LMA) has launched a new set of loan principles: the sustainability-linked-loan principles (SLLPs). These, like the green-loan principles (GLPs), seek to set specific parameters around the governance and rigour of the instruments. They include information on how to select sustainability criteria, how to measure improvement through third-party involvement and how to give some indications of timeframe.
The GLPs set a standard for companies to follow and supported the execution of several key transactions from the Asian region, for example the first green loan for Macquarie Bank. We expect a similar pick-up in activity after the SLLPs come into effect.
To what extent did the GLP form the basis for the SLLP?
Given what you are describing is largely a transition product, are there any particular industry sectors that the product best lends itself to?
I believe the SLLPs will support greater uptake across sectors. From a regulatory perspective, conversations are ongoing around the requirement to introduce preferential status in respect of green finance. It is important to our clients that they can show the steps they are taking to improve in this area – whether via a green loan or a product like an SPL where they can demonstrate environmental transition.
However, it is also possible to be more detail-oriented around the ESG drivers for a particular sector and, even if a company is unrated, KPIs can be used as a benchmark to drive change.
What is the weighting of the ‘E’, ‘S’ and ‘G’ in SPLs?
How challenging are the targets borrowers have to achieve as performance hurdles in SPLs?
What sort of incremental pricing can SPL borrowers receive?
Presumably there is a quantitative aspect to SPLs. What is the evidence linking sustainability and financial performance?
Of course, the question is whether this comes down to a higher sustainability effort or the fact that these companies are just better managed.
To me, this is an indicator that companies are taking their licence to operate seriously by future-proofing their businesses. This means it is an important indicator but not necessarily a sign of being a ‘good’ credit.
Are SPLs exclusively going to be a bank product?
Financial institution issuers yearbook 2018.
The first annual guide to global financial-institution issuers.