The sustainable finance tide continues to rise, with an increasing number of companies choosing to link their debt to their sustainability goals.
As the world’s leaders gathered in Glasgow to outline their climate commitments at the COP26 summit, sustainable finance experts, including Nordea’s own Ebba Ramel, appeared at the Exponential Climate Action Summit IV – COP26 Backdoor to raise awareness of financing options that help drive the transition towards a sustainable economy.
The virtual event, hosted by the tech start-up We Don’t Have Time, highlighted the recent example of Swedish telecom equipment maker Ericsson’s USD 2 billion sustainability-linked revolving credit facility (RCF). In renewing its RCF from 2013, Ericsson this year decided to tie the terms of the financing to two of its sustainability goals: carbon neutrality in its own operations by 2030 and having its suppliers set 1.5°C-aligned climate targets.
Commenting on the event itself, Nordea’s Ramel emphasised that it was important to spread knowledge of these types of sustainable financing options.
“Not all organisations or corporates might know that they exist. Companies leading by example, as in the case of Ericsson, and showcasing what they did, is great for increasing awareness.”
Selecting sustainability KPIs
An RCF is a line of credit companies can draw on to finance general corporate purposes, such as working capital or capital expenditures. The sustainability-linked feature is not dependent on the type of debt but can rather be used with different debt formats.
The terms of the debt are tied to a company’s material and ambitious sustainability key performance indicators (KPIs). If the company meets those KPIs, it gets a margin discount, while failure to meet those targets triggers a margin increase.
In Ericsson’s case, Nordea was one of 18 banks providing the financing for the RCF.
“We were thrilled when treasury and our CFO started to talk about linking the RCF to our sustainability work, and especially our climate targets” said panellist Emelie Öhlander, Climate Action Program Manager at Ericsson.
In selecting which KPIs to link, the company wanted to use annual targets that are measurable, Öhlander said. It also did not want to set up new targets but rather use the RCF to help achieve its existing targets. That led to the decision to go with the carbon-neutrality and supplier target-setting KPIs.
“We will within the RCF update the climate targets, because we know we are evolving and progress is made daily in our climate action work,” she added.
A booming market
Fellow panellist Eloïse Boutin of Credit Agricole CIB, another bank involved in Ericsson’s RCF, described a “booming” sustainable finance market, with volumes accelerating strongly over the past two years.
In the European loan market in Q2 2021, for example, over half of the RCFs that were refinanced were sustainability-linked, she noted. In addition, for the European bond market since the beginning of the year, more than 20% of new issuance was either green, social or sustainability-linked.
“It’s expanding. The market and the regulation are also consistently evolving, which will drive more impact and innovation going forward,” Boutin said.
The market initially centred around the use-of-proceeds format of green bonds, where investors can invest in projects that are already green or social. The newer sustainability-linked format allows the company to select material and ambitious KPIs for the entire organisation that can drive some kind of transition.
“These two formats can work really great together for companies that have large investments in green or social activities, but also have ambitions to improve and increase their sustainability impact. For some companies, there can be one part of the business that’s already green, while another unit needs a transition to become greener,” said Nordea’s Ramel.
She also highlighted the importance of banks’ role to raise awareness and bring clarity to the different available formats, and to help guard against greenwashing.
“We need to make sure organisations are not afraid of these formats, that they work as they should and will not pose any risks of greenwashing,” she said.
Watch the recording of the panel discussion here (starting at 2:27).
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