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Banks can use sustainability-linked loans to prod clients into going green
ENVIRONMENTAL, social and governance (ESG) considerations are moving out of a specialised niche into mainstream banking.
DBS Bank has completed a total of S$4.3 billion in sustainable financing deals from sustainability-linked loans (SLLs) and green loans since 2018, according to Yulanda Chung, Head of Sustainability, Institutional Banking Group at DBS.
Just last month, the bank issued a S$250 million three-year loan to City Developments Limited (CDL) with interest rate discounts linked to the property group's sustainability-related performance. Borrowing costs will be lowered when CDL achieves mutually agreed on sustainability-related performance targets. These include innovations that contribute to the United Nations sustainable development goals as determined by an independently appointed expert panel and remaining listed on at least one leading global sustainability index.
Early this week, HSBC Singapore and OCBC Bank completed a S$248 million three-year green loan to SoilBuild for the redevelopment of Solaris @ Tai Seng. The transaction marks the latest in a string of green loans executed here by HSBC, including Singapore's first green loan under Loan Market Association (LMA) Green Loan Principles for property firm Ho Bee Land and Ireland's First Green loan under LMA Green Loan Principles for Oxley, another property group.
Green loans - which are created to specifically fund projects that have positive environmental and climate benefits - have been growing in popularity in Singapore. Such loans are hugely popular with property companies involved in commercial or residential developments with environment-friendly features, Ms Chung shared. Green financing, therefore, plays a crucial role in channelling capital to building more climate-friendly infrastructure.
Not surprising, the global growth outlook for green and sustainable lending is promising, with more lenders looking to mobilise the US$100 trillion bond market for climate change solutions. But the jury is still out on the effectiveness of green loans in combating climate change and its growth prospects given their more restrictive nature which stipulates that proceeds must be used purely for green purposes.
In contrast, the growth prospect for the less restrictive SLLs without the capital expenditure and investment scale of green loans appear more promising. And nothing is more powerful in convincing bottomline-conscious executives in brown companies to go green than access to cheaper bank loans.
This is why SLLs have been described as positive incentive loans. SLLs focus on effort, not the use of proceeds, allowing borrowers to win a concession in interest charges. If a company achieves a pre-determined ESG target, its cost of borrowing will be decreased, or vice versa.
SLLs can be used to nudge brown companies towards overall positive sustainability performance. Unlike green bonds or loans where the use of proceeds is narrowly tied to fund eligible green projects only, SLLs can be used for general corporate purposes. This opens the sustainable lending market to borrowers who may not have an existing fleet of green assets. Suddenly, the target market has become bigger.
SLLs as innovative tools
Using ESG targets which are material to clients' operations will generate meaningful positive impacts. This is evident in the increasingly diverse client base tapping on SLLs.
Take DBS for instance. The bank has seen many agricultural commodities clients keen to tap into SLLs. This is encouraging as the sector is a significant consumer of resources. Agriculture irrigation alone accounts for 70 per cent of water use worldwide and land use change gives rise to climate change impacts.
Potential clients expand beyond multinational corporations too.
In May this year, DBS signed the city-state's first ESG-linked loan for a small-medium-enterprise (SME). It gave a 10-year, S$27 million, SLL to Chew's Agriculture, a leading egg producer in Singapore. The loan was evaluated based on a series of ESG performance metrics. Chew's - which supplies 500,000 eggs a day - will enjoy lower interest rates if it meets Humane Farm Animal Care (HFAC) standards such as providing livestock access to wholesome and nutritious feed, appropriate environmental design, caring and responsible planning and management of livestock, and skilled, knowledgeable conscientious animal care - factors that contribute to more nutritious eggs.
SLLs are clearly very powerful innovative tools which banks can use to help motivate diverse clients in their sustainability strategies, using concrete, measurable actions that hit bottomlines.