Sustaining Trend in Global Finance – Sustainability-Linked Finance Market

The market for sustainability-linked loans and bonds (SLLs and SLBs) is quickly growing. SLLs and SLBs, unlike green loans and bonds, are performance-based rather than activity-based sustainable finance instruments, which means that there are no restrictions on the use of proceeds from an SLL/SLB — the issuer/borrower can use the proceeds for any purpose, not just for "green" expenditures and activities. Instead of pre-defined sustainability performance targets (SPTs), the conditions of an SLL/SLB (typically the interest rate) will fluctuate based on the success of the issuer's or borrower's business.

The type and degree of applicable SPT(s) chosen are determined by the industry and business model of the issuer/borrower in question, but they are to be ambitious, quantifiable, and connected with the issuer/long-term borrower's sustainability plan.

Multifold Benefits Provided Are Encouraging the Market Demand

Issuers and borrowers are increasingly turning to SLLs/SLBs to: Optimize pricing, liquidity, and cost of capital by tapping into institutional investors' and financial institutions' surplus demand for sustainable financing products; Raise sustainable capital while maintaining complete freedom in how the funds are used and to show their ESG credentials.

Opportunity to Decrease the Cost of Capital Is Driving the Market Growth

The prime reason supporting the growth of the market in the forecast period is the flexibility of proceeds that SLLs and SLBs offer in addition to the opportunity to decrease the cost of capital by associating the interest rates to the sustainability performance of the issuer/borrower. Furthermore, the vast array of possibilities and high future scope of the sustainability-linked finance market is further increasing their adoption by the corporates. In December 2019, building controls company Johnson Controls took up an SLL linking the cost of a $3 billion line of credit to its ESG performance. The contract was underwritten by a consortium of 18 major banks, consisting of JPMorgan Chase, Bank of America, Barclays, and Citibank.

Favorable Structure of the Instruments Are Gaining Market Interest

Employee safety and greenhouse gas emission reductions from client projects and operations are among the sustainability performance goals. Sustainability-linked financing offers a win-win situation for all stakeholders by addressing a variety of hot-button problems while also providing a risk hedge.

Enhanced Brand Image and Reception Lead to Increased Adoption

Furthermore, since the United Nations established the Sustainable Development Objectives in 2015, many corporate firms have begun to define and strive toward those sustainable goals to improve their brand image and reception. Due to their high ESG rankings, these companies have now adopted these sustainability-linked funding solutions.

JetBlue Airways took up a sustainability-linked loan from BNP Paribas, a French banking firm, in February 2020 to replace an existing $550 million line of credit. The interest rate is computed by Vigeo Eiris, a U.K.-based external provider/reviewer of ESG research and services, using the airline's ESG score.

Regulatory Promotion and Support to Facilitate Market Expansion

Governments and agencies are promoting and rewarding the use of SLLs and SLBs since sustainability-linked financing is a reliable solution to environmental concerns. The Sustainable Banking Network (SBN) is a one-of-a-kind worldwide effort that brings together a voluntary community of regulatory agencies and banking organizations to encourage collective learning and assist the creation of initiatives that promote sustainable investment. The SBN released its Global Progress Report in October 2019, assessing sustainable finance policies in 38 member countries and recommending practical metrics and instruments that members may use in their home markets.

Furthermore, in October 2019, public regulatory agencies from Argentina, Canada, Chile, China, India, Kenya, Morocco, and the European Union formed the International Platform on Sustainable Finance, which accounts for about half of global greenhouse gas emissions. The platform's main goal is to promote best practices in sustainable finance and, when possible, to increase cooperation. On February 6, 2020, the European Securities and Markets Authority (ESMA) released its sustainable finance plan. In addition to the implementation of the EU Single Rulebook, supervisory convergence, direct supervision, and risk assessments, ESMA will investigate sustainable business models and incorporating ESG related aspects across its activities.

Favorable Structural Variable to Propel the Market Accessibility

Furthermore, because of the openness and accountability involved, investors/lenders and other stakeholders are increasingly adopting sustainability-linked funding. Citizens all around the world are looking for corporations to bear responsibility for their activities, which may result in catastrophic and unprecedented circumstances like the pandemic. The market for sustainability-linked financing is anticipated to develop even faster as a result of this.

Impact of COVID-19 Pandemic

Furthermore, the COVID-19 epidemic provided a significant boost to the sustainability-linked financing industry. It was embraced by governments, banks, corporations, and others to fund the research of vaccines and treatments, as well as to help healthcare systems combat the outbreak and offer assistance. Companies in some industries, such as pharmaceuticals and fast-moving consumer goods, were compelled to use a flexible source of funding due to growing demand.

General Mills Inc., a US-based consumer packaged goods company, in April 2021, put in place a $2.7 billion sustainability-linked revolving credit facility involving 20 of the company’s banking partners including JPMorgan Chase Bank, Barclays Bank PLC, Citibank, N.A, Deutsche Bank Securities Inc., and BNP Paribas. BofA Securities, Inc. is acting as the Sustainability Coordinator.