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Will sustainability-linked loans drive a revolution in finance?

The carrots and sticks of a growing corporate finance mechanism.

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In February, Anheuser-Busch InBev (AB InBev) announced a $10.1 billion sustainability-linked revolving credit facility. The announcement send shockwaves through the market; it was the largest sustainability-linked loan (SLL) among publicly listed companies in the alcohol sector. By using a pricing mechanism that incentivizes improvement in areas aligned with the company’s 2025 sustainability goals, the loan connects the dots between financial and non-financial risks by replacing the company’s credit line, a longstanding vanguard of business worthiness, with one heavily dependent on sustainability metrics.

For most companies, linking sustainability performance to financial credit risk has remained a theoretical aspiration. As AB InBev’s CFO Fernando Tennenbaum put it, "We don’t need a business case for addressing these issues. If our communities and environment are not healthy, we have no business. So, for us, it’s very easy to champion this work."

Tennenbaum spoke Wednesday at GreenFin 21, along with Enel Group CFO Alberto De Paoli and PIMCO’s U.S. Chief Investment Officer Scott Mather. (The video of the entire plenary session may be viewed on the home page.)

For De Paoli, AB InBev’s loan has been welcome news.

For many companies, sustainability issues are increasingly becoming business issues, attracting the attention of the treasury and CFO offices.

When Enel, an Italian utility, launched a $1.61 billion sustainability-linked credit facility in 2019, it did so as part of its sustainability-linked financing framework, and to mark its commitment to the UN Sustainable Development Goals. Now, as the utility charts its way toward decarbonization, this facility gives it a key KPI target to aim for. In other words, get market-based credit for investing in renewable energy and alternative energy solutions.

"We shifted course dramatically in 2015, realizing that the only way forward to run a viable sustainable company is by choosing the sustainable way, that is, helping decarbonize our economy, digitize our infrastructure and electrify consumption," he offered. These sustainability goals have become part of the utility’s overall business strategy.

Carrot and stick

And the market responded. Moody’s upgraded Enel’s long-term credit rating in January, citing progress in improving the group’s business risk profile as a result of its investments and efforts. As Emily Chasan, who served as the GreenFin session moderator, recently wrote, there were few mechanisms in the market to truly hold companies accountable for reaching their sustainability goals before the recent rise of sustainability-linked loans.

A shareholder proposal, even if it got approved, often led to disclosure about how a company was performing — but not necessarily to better performance. More often, a company would fall onto the more comfortable tactic: disclosing actions but not impact. Now, with Enel already enjoying an early return on its commitment and AB InBev’s sustainability-linked loan set to align the company’s sustainability performance with its credit rating, there is reason to believe that this mechanism could catch on — part carrot, part stick.

A pricing mechanism in the market can help connect billions in credit with sustainability performance. A viable business model that can prove sustenance and its future worth amid a changing climate can help build the firm’s credit favorability while cementing employee and customer loyalty along the way.  

As a result, for many companies, sustainability issues are increasingly becoming business issues, attracting the attention of the treasury and CFO offices. According to De Paoli, with Enel’s SLL, investors no longer have to choose between commitments and short-term impact. "The problem now is that [because of these loans], if Enel does not hit the target we have set, I am basically offering my investors a company that is less profitable and more risky," he explained.  

This provides investors — and active sustainability-oriented companies — a real way to link economics and sustainability.

Standardized disclosure

So, how should this performance translate into comparable and meaningful disclosure? For PIMCO’s Mather, Enel and AB InBev have "turbocharged a movement in the market, which is already leading to more portfolios being devoted to this." In fact, Mather expects the SLL market to grow many times bigger than the green bond market, which because of its higher costs has failed to become the financial mechanism it could have become.

But the dramatic surge will depend on better disclosure, better ratings and better metrics.

And that might be where we see regulatory action sooner than we think.

So, if you’re a corporate reporter, buckle up and make friends with your treasurer and CFO’s office. If you’re an investor, get ready to see more measurable goals from companies, followed by quantifiable progress and better clarity than ever before on how they plan to mitigate ESG risks and ensure their creditworthiness — and their very future.

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