This is a strong trend in sustainable finance according to Bloomberg, and even the “future of banking”, according to some experts. Since their creation at the end of 2017, "sustainability linked loans" or “positive incentive loans” have made a remarkable breakthrough in the world of sustainable finance and beyond, in a dynamic convergence of banks, investors and companies around overall performance.
Faced with a $180 billion green bond market, this new product is already valued at nearly $40 billion ($36 billion in 2018) and banks estimate that this value will continue to rise with the huge influx of applications from (primarily) European companies. Broader in scope that green bonds (which are dedicated to financing green projects), positive incentive loans are not allocated to specific projects, and they concern companies of all sizes and sectors. However, these loans require a certain maturity in terms of social responsibility. This most likely explains their recent appearance on the market.
An incentive for overall performance
These loans are indexed according to company extra-financial performance, either on their ESG rating carried out by specialized agencies, or on some specific indicators defined by the bank and the company, which tends to be more generalized. If the company meets or exceeds these objectives, it receives a bonus. If the company fails, it can incur a penalty, or even be forced to carry out corrective actions the following year. "The purpose is to evaluate the company not on its commitments but on its achievement," said Cécile Moitry, Head of Finance and Sustainable Investment at BNP Paribas CIB. Among the 50 or so issuers that have subscribed to these types of loans indexed on ESG criteria are French companies including: Danone, EDF, Bel and Séché environment.
For companies, interest is financial but not only. After subscribing to its first loan of €150 million in 2017, EDF has paid to extend the loan to its main line of syndicated credit (24 banks) for a total of €4 billion. "The amounts of bonuses or penalties do not modify EDF's financial expenses, but this is significant enough to create internal leverage, an incentive for extra-financial performance, and to anchor it in different business lines: finance and CSR. Ultimately, this is really transformative within the company," said Alexandre Marty, Head of Investor Relations at EDF's Finance Department. This explains the interest in choosing the indicators on which the evaluation of the company will be carried out. In the case of this latest loan, they concern the group's direct CO2 emissions, the level of the commitment from its private customers in monitoring their consumption and the electrification of its 40,000 fleet light-weight vehicles.
A bet on the future
This lever of transformation and dialogue is shared by the Bel group. In 2018, the cheese manufacturer indexed its €520 million multi-currency revolving credit line on greenhouse gas (GHG) emission reduction targets, the development of a nutritional education program in key countries for the group and the deployment of a concrete action program for a sustainable dairy subsidiary.
"This allows us to show our banks and investors that they are financing a company that is committed, and to prove to all of our stakeholders that CSR is at the heart of our strategy", assured Benoit Rousseau, Head of Finance for the group. Beyond this, it is also a "bet on the future". Rousseau explained, “we should not focus on short-term financial gains. We believe that in a few years, in a world where liquidity would be more constrained, banks will charge more for companies that do not have responsible or sustainable policies and will charge less to companies that prove their sustainable commitment".
Société Générale is betting on the same thing. "Our idea, which is still centered around the intuition that remains to be demonstrated especially in terms of credit risk, is that a company that implements an ambitious CSR policy addressing significant environmental and social challenges, will be more sustainable. Working with the company to define extra-financial indicators and ensure their monitoring allows us to have a more strategic vision of the company and its ability to meet these challenges ", emphasises Sandrine Enguehard, Head of Structuring for" Positive Impact " at Société Générale.
For banks, this also allows them to implement their own sustainable development strategy. "BNP Paribas is very clearly committed to the energy transition, and being able to work directly with companies on their ambitions and achievements in this area allows us to translate our own commitments into concrete and immediate action," said Cécile Moitry of BNP Paribas.
Many factors add to the success of these types of loans."Funding is not renegotiated unless it is requested," said Moitry. But the answer is not systematic. “Refusals are frequent”, said Enguehard. It's all about maturity!
Béatrice Héraud, @beatriceheraud