Putting Sustainable Finance to Good Corporate Use

With green financing levels at record highs, corporate treasurers now have access to a source of funding that can play a vital role in supporting their organisations’ sustainable goals. Here, we explain how to perfectly marry sustainable finance with environmental, social and governance aims, including the transition towards a circular economy model.

Green financing for corporates is on a roll. Despite the turbulent nature of 2020, with the Covid-19 pandemic causing widespread disruption in all areas of financial life, the year still saw a record level of green bond issuance. According to data from the Climate Bonds Initiative (CBI) released in January 2021,^[1] by the end of December 2020, green bond issuance had hit $269.5bn. This just pipped the level of issuance seen in 2019 ($266.5bn) and showed that the market remained robust despite the challenges presented by the pandemic.

The CBI data includes other positive signs for green financing. Diversity of financial instruments is becoming more mainstream, with green loan and green sukuk origination locations more than doubling year-on-year, from 11 countries in 2019 up to 23 in 2020. Add green bonds to that mix and 53 countries originated green financing last year. Meanwhile, the average annual issuance of green debt grew by 60% between 2015 and 2020, with the market passing the cumulative $1tr. milestone in December 2020.

This momentum has accelerated further in 2021. Data from Refinitiv Deals Intelligence shows that green bond issuance hit $259bn in the first half of the year, almost three times higher than at the same point last year.^[2] Meanwhile, in October 2021, Japan’s Nippon Telegraph and Telephone Corporation (NTT Group) produced one of the largest single issuances of green bonds by a company that the world has ever seen. The offering, made up of three-year, five-year, and 10-year tranches, was valued at ¥300bn^[3] – approximately $2.6bn. According to data compiled by Bloomberg, this makes it the biggest offering ever of environmentally-friendly debt in Japan.^[4]

Using green financing to support sustainable corporate goals

According to Leonie Schreve, Global Head Sustainable Finance, ING, sustainable finance is something you now “see everywhere”, but there are some sectors where an urgency for change is driving a growing number of requests from executives keen to see what is on offer. Knowing that the financing is out there is one thing, but ensuring it is aligned with achievable corporate sustainability goals is quite another.

One company that has been able to tap into sustainability-linked loans to support its green goals is US data-centre company Aligned Energy.

As the pandemic accelerates trends such as remote working and cloud computing, data centres have become increasingly essential elements of global infrastructure, which puts their electricity usage and renewability under the spotlight. Data centres’ energy consumption is significant. According to think tank Energy Innovation: Policy and Technology, some of the world’s largest use the same amount as needed to power 80,000 homes for a year.^[5]

This is why Aligned Energy has taken a proactive step to secure a $1bn loan comprising a $250m revolving credit facility. This financial tool enables the company to repay the loan in a flexible manner. The remainder of the financing consists of a $650m term loan and a $100m delayed-draw term loan.^[6] To ensure accountability, the loan to Aligned Energy is structured with sustainability key performance indicators (KPIs) based on principles set by the Global ESG Benchmark for Real Assets.^[7] This supports the company’s mission to match 100% of its annual energy consumption to zero-carbon renewable energy by 2024.

Commenting on the financing in the press announcement, Anubhav Raj, Aligned Energy’s Chief Financial Officer, said that the loan will also help it to set a “best-in-class example for the data-centre industry with respect to environmentally and socially sustainable growth.”

Elsewhere, US-headquartered multinational retailer Walmart announced the closing of its inaugural $2bn green bond issuance in September 2021.^[8] The green bond is Walmart’s first offering under the company’s Green Financing Framework, published August 2021, which details the firm’s alignment with the 2021 Green Bond Principles, administered by the International Capital Market Association (ICMA).

“The closing of our first-ever green bond offering directs capital toward projects that will advance our environmental sustainability goals now and in the years to come. These goals include achieving 100% renewable energy by 2035 and zero emissions in our operations by 2040,” Kathleen McLaughlin, Executive Vice President and Chief Sustainability Officer, Walmart, said in a statement at the time. “Becoming a regenerative company is a journey. This green bond signals that we continue to make headway. We remain steadfast in our commitment to addressing climate change, transitioning to a circular economy and restoring natural ecosystems, all while supporting the communities in which we operate.”

Walmart says it will allocate an amount equal to the net proceeds of the $2bn offering toward a portfolio of Eligible Green Investments, across categories including projects focusing on renewable energy; high-performance buildings; sustainable transport; quality and efficient water stewardship; habitat restoration and conservation; and zero waste and the circular economy.

Embracing the circular economy

As seen in the Walmart example, sustainable finance is also being used to help companies transition way from a linear economy model towards a circular one instead. According to the Ellen MacArthur Foundation, the circular economy is a system based on the principles of “designing out waste and pollution, keeping products and materials in use, and regenerating natural systems” by decoupling economic activity from the consumption of finite resources, all while redefining growth to focus on positive society-wide benefits.^[9]

As Marieke Blom, Chief Economist, ING Netherlands, notes: “The circular economy is a means to achieve a goal. The final objective of the circular economy is to limit the harm, for example, to biodiversity or the climate or to reduce pollution. From the perspective of saving the planet, it’s necessary for companies to begin working in a different way.”

One corporate that has recognised this need is multinational drinks and brewing company AB InBev, which in February 2021 announced that it had signed a $10.1bn sustainability-linked revolving credit facility – the largest deal of its kind – with a consortium of 26 global financial institutions.^[10]

The deal’s initial five-year term aims to support a number of the company’s goals, including its mission to increase the amount of recycled content used for its packaging. It incorporates a pricing mechanism designed to incentivise the company to reach its 2025 goals of 100% of products being in packaging that is “returnable or made from majority recycled content”.^[11]

Speaking at the time, AB InBev CFO Fernando Tennenbaum commented: “We are excited by the further integration of sustainable finance principles into the capital markets and welcome the opportunity to embed these practices deeper into both our finance organisation and the broader company. Our business is closely tied to the natural environment, and it is imperative that we continue to strengthen our leadership in addressing the increasing threats of climate change. Our business and our communities depend on it.”

Another example of treasury supporting the circular economy comes from German chemicals giant BASF, which in May 2020 placed €2bn of bonds on the capital market, with one tranche worth €1bn dedicated to the company’s first green bond.^[12] Some of the proceeds from the bonds drawn up by the treasury and finance team are being used to develop innovative technologies that support the recycling of chemicals – a vital element of a circular economy operation.

“The strong demand from investors for BASF bonds underscores the capital market’s confidence in our solid financial policies and our sustainability-driven corporate strategy,” BASF’s Chief Financial Officer Dr Hans-Ulrich Engel commented in the bond announcement. “The initial issue of a green bond now firmly anchors sustainability in BASF’s financing strategy as well.”

According to Joost van Dun, Circular Economy Lead, ING Sustainable Finance, the push towards a circular economy model means new business concepts – ownership of a product remaining with the producer, for example. This moves businesses towards a “rental agreement” and incentivises producers to build durable products, placing responsibility in their hands for the “use phase and end-of-life phase” of products. In short, the longer a product is kept “in the loop”, the more revenue it can generate. There are benefits to this, but it will demand financial innovation on the part of lenders.

With the increase in green bond issuance persisting despite the pandemic, it’s clear that investors are keen to buy in to corporate environmental, social, and governance (ESG) programmes that are supported by green finance frameworks. For treasurers, this means more opportunity to support organisational ESG goals through aligned funding.

While the sustainable finance market is relatively young, ING’s Schreve sees these emerging deals as clear motivators for peers of the likes of Aligned Energy and AB InBev to follow suit. And they will need to do so because financing the transition to a sustainable future will separate those set to thrive from the rest.

“If you’re leading on sustainability, then you make yourself resilient for the future,” says Schreve. “If you don’t take any action, you will be out of business.”