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Sustainability-linked loans: Next instrument in green financing?

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Out of the S$2.4 billion in sustainable financing that DBS doled out last year, sustainability performance-linked loans amounted to over S$600 million.

Singapore

WITH more companies looking towards creating a more sustainable business, finding ways to fund those ambitions have evolved over the years, with "sustainable financing" becoming a priority in the past year.

While a lot of the focus has been on green bonds and green loans - interest in a newer type of loan, sustainability-linked (SL) loans, is starting to take form. Although the green focus for all these loan types is similar - the ways of getting there are quite different.

SL loans, unlike green loans and bonds, are focused on a borrower's environmental, social and governance (ESG) performance. Interest rates for these loans may then be reduced, based on how well the company performs against said ESG metrics. Uses of these proceeds are also not restricted and can be used for general corporate purposes.

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Green loans and bonds meanwhile, focus on the use of proceeds which provide clear environmental benefits to be assessed and where "feasibly quantified, measured and reported by the borrower," said Nicolas Parrot, BNP Paribas head of investment banking Asia-Pacific - transportation sector.

"Given the wider scope and higher flexibility of SL loans, we believe that over time, SL loans will appeal to a wider spectrum of clients than green loans or green bonds," Mr Parrot said.

Despite emerging interest in SL loans, DBS chief sustainability officer Mikkel Larsen said when it comes to institutional capital markets, green bonds are still considered the most common instrument.

Out of the S$2.4 billion in sustainable financing that DBS doled out last year, sustainability performance-linked loans amounted to over S$600 million. The remaining S$1.8 billion went towards financing renewable energy and other green loans.

Sector-wise, real estate saw the "most momentum" when it came to sustainable financing overall, Mr Larsen said, as this sector is the one aided by well-established rating systems in identifying green assets in many countries.

"Early real estate movers of sustainable finance have set an example to their peers," he added.

The real estate sector was also one which was identified by rival banks UOB and OCBC as having rising interest in sustainable financing.

Earlier in July, property developer CapitaLand secured its second tranche of S$300 million in SL loans from banks Societe Generale, Credit Agricole Corporate & Investment Bank and Natixis Bank. It previously obtained a SL loan of the same amount from DBS in 2018.

CapitaLand group chief financial officer Andrew Lim said in a statement to The Business Times that the flexibility of SL loans was a draw, as opting for a SL loan provides a "more stringent but holistic assessment" of the group's overall impact to its stakeholders and communities it operates in.

On the green loans front in the same sector, Frasers Property recently secured an A$750 million (S$715.2 million) term loan, comprising an A$500 million green loan tranche and an A$250 million five-year tranche. The A$500 million tranche was said to be Singapore's first green loan with a pricing structure linked to the BCA Green Mark, a rating system for a building's environmental impact and performance.

In May, United Engineers converted a S$333 million loan into a green loan for a residential property development; while in March, City Developments Limited bagged S$500 million in green loans for its new property developments - S$400 million issued by DBS, and S$100 million extended by HSBC.

Other sectors seeing demand for sustainable financing include renewable energy, according to OCBC and UOB, as well as agriculture, water and waste management, energy efficiency and sustainable sourcing.

Elaine Lam, OCBC Bank's head of global corporate banking, said: "In general, we are seeing more green projects and are ramping up efforts to provide financing support for such projects."

Bonar Silalahi, managing director, sector solutions group, group wholesale banking at UOB, said there has been increasing awareness of such financing solutions since the 2015 Paris Agreement on climate change - one key aspect obligating developed countries to give financial, technology and capacity building support.

While appetite for sustainability investment is still strongest in Europe and the United States, Stephen Williams, HSBC head of global banking, South-east Asia, said Asia is gaining momentum.

The global tally of socially responsible investment assets has grown to almost US$23 trillion today, from US$13 trillion in 2012, driven by the implementation of green loan and green bond standards, and with sustainability moving up the agenda of regulators.

Corporate clients are expected to continue being active, especially in the areas of energy transition, water management, pollution control and climate control. "These themes are particularly important in Asia given its population density and climate vulnerability," Mr Williams added.