KPIs to drive real-world change
Successful sustainability-linked loans require rigorous KPIs that are material to the business, meet global standards and satisfy the oversight of all participants. The criteria deployed by Incitec Pivot, particularly around climate transition, and G8 Education, targeting social outcomes, demonstrate the bespoke qualities such facilities can offer.
Both borrowers landed on KPIs for their SLLs that have been externally reviewed – by the same provider, DNV GL Business Assurance Australia – and that are consistent with the Asia-Pacific Loan Market Association (APLMA)’s Sustainability-Linked Loan Principles.
The requirement on IPL and its SLL structurer, Westpac Institutional Bank, was to develop KPIs that tackle its status as a hard-to-abate company head on and offer the prospect of real positive change during the life of the loan and beyond. It settled on three such targets.
The most challenging area to develop concerns ammonia plants’ greenhouse gas (GHG) emissions. IPL’s general manager, treasury, Uri Gordon, explains that the lifecycle of ammonia plants makes it hard to implement new emissions technologies on an ad-hoc basis. Instead, plant operators typically have to wait until a major overhaul – a process that shuts a plant for several weeks but only takes place every 3-4 years – to make this type of change.
The engineering process has to start well in advance to prepare long lead-time items for these plant turnarounds, and Gordon says the SLL KPI is based on identifying in the present day commitments that can be rolled out over future years.
“Our challenge was to convince our banks that even though the impacts of this KPI will not be seen within the life of the facility we are looking at a journey rather than a quick win. Credit to the banks’ sustainability teams in being able to recognise this and support the KPI,” he comments.
This ties in with the idea of the SLL as a means of weaving financing in with longer-term transition and sustainability commitments. IPL’s SLL has three-year tenor but its impact should be felt long after its maturity.
“When planning the SLL we talked about targets being relevant during the life of the facility but, more importantly, how they actually incentivise IPL toward its net-zero pathway beyond the life of the facility,” says Michael Chen, head of sustainable finance at Westpac.
IPL’s other KPIs cover municipal water use and soil testing. The ammonia production process is also highly water-intensive, and Gordon says the loan incorporates measurement of IPL’s success in replacing council water with recycled water. “This is a very ambitious target within a short period of time, but it is relatively easy to measure – because we can see how many litres of water we are using,” he says.
The soil-testing KPI is designed to incentivise IPL’s strategy of engaging with users of fertiliser to identify the optimal amount of nutrients required and, together with other services offered by the company, to enable farmers to have the necessary tools and knowledge of more environmentally sustainable and resilient agricultural practices while improving productivity crop yields.
Australia does not have requirements to use specific types of advanced fertiliser, Gordon explains, so IPL’s approach is to influence farmers through the company’s agronomy services. The goal is to advance their level of knowledge about more efficient ways to grow crops and ensure that excess fertilisers are not used, only what is needed for the crop to maximise yields. This reduces the impact of excess nutrients leaching to the environment
By engaging with large farming operations to implement wide-range soil testing, the company is able to design blended fertilisers for farms to ensure they are using nutrients that best meet their individual needs. Gordon tells KangaNews: “We are able to highlight and demonstrate to the farmer that they achieve better returns by using a specific blend of fertilisers. We are also able to improve the environmental impact of their farming operations.”
G8 faced a different set of challenges in determining its SLL KPIs, primarily around the measurability of social outcomes. One thing G8 has in common with IPL was its requirement for the loan incentives to be based on quantifiable and benchmarked outcomes that are material to its business – in this case, those outcomes being social rather than environmental.
However, social factors can be harder to measure than, for instance, greenhouse gas emissions made or abated. G8 therefore added a further layer of external benchmarking to its criteria. Its KPIs are linked to quality of education and care, and the safety of G8 team members. These will be measured by the Australian Children's Education and Care Quality Authority rating and by team member lost time injury frequency rate.
“We actually have five or six quantifiable targets, around things like child safety and staff training,” explains Tracey Wood, G8’s Brisbane-based general counsel and company secretary. “The targets are quality- and safety-based rather than environmental, which is consistent with a materiality assessment.”
Chen adds: “The conversation with G8 quickly became one about how we could structure a loan to bring out things like the company’s continuous-improvement targets – giving an incentive to meet ambitious goals and continue to be a leader in the industry. The sustainability-linked structure worked really well for G8.”