Under a sustainability linked loan (SLL) structure a company’s cost of capital is explicitly tied to its third party-verified sustainability performance – i.e. the margin on a loan is directly linked to the borrower’s performance against pre-agreed sustainability target(s).
Proceeds can be used for general corporate purposes (i.e. not tied to a specific green or social asset), so the SLL may be suitable for companies that would not traditionally have access to the green bond/loan market due to lack of ownership of ‘green’ assets.
SLLs are relevant for companies with a determination to improve their sustainability performance and align their cost of capital with that performance.
It is important the parties agree to sustainability target/s that are ambitious, to incentivise material improvement in sustainability performance. Pre-agreed targets must be carefully aligned with the borrower’s sustainability strategy.
Where companies have very broad sustainability ambitions, a material improvement in their ESG rating, provided by an independent third party rating agency, may be an appropriate target.
The Asia Pacific Loan Market Association recently released ‘SLL Principles’ as guidance for lenders and borrowers. These principles underpin market integrity and consistency.
The majority of SLL transactions completed to date have been in Europe, with a handful completed more recently in Asia and in the US.
SLLs are new to the Australian market. The first SLL was a bilateral facility provided to Adelaide Airport by ANZ in December 2018. The first syndicated SLL to launch in Australia was provided to Sydney Airport in May.
ANZ has committed to fund and facilitate at least $A15 billion in low carbon and sustainable solutions by October 2020 with $A14.5 billion already committed as at March 31. ANZ has played a key role in developing the green, social and sustainability bond and loan markets across Australia, New Zealand and Asia.
ANZ has arranged over $A16 billion (equivalent) of green, social and sustainability bonds and loans across Australia, New Zealand and Asia in $A, $NZ, $US, CNH and Euro for a broad range of corporate and frequent issuers. ANZ also has strong experience as an Issuer of both green and sustainability bonds.
At the same time, the loan market has gained momentum and ANZ has arranged $A3.3 billion equivalent of green loans and sustainability linked loans.
In 2018, ANZ was awarded Finance Asia’s Best Sustainable Finance House Australian Achievement Awards 2018, reflecting our position as clear leader in the sustainable finance sector in Australia. The bank is a green bond principles member and a climate bonds initiative partner. It also participates in the Loan Market Association's green loans committee.
This is an edited version of a story that appeared in the Infrastructure Partnership Australia Yearbook 2019.