Can meeting your sustainability goals help lower your company’s debt? It’s a trend that certainly merits looking into as debt products with a definite green spin has been around for a while but are now in their ascendant, prompting experts to predict that these will soon become standard when it comes to corporate borrowing.
According to law professor Carol Liao of the University of British Columbia’s Dhillon Centre for Business Ethics, sustainability has become a megatrend that has caused a significant paradigm shift in the way competitiveness is measured between companies.
As she puts it “Linking sustainability targets to corporate debt[hits companies] where they feel it the most.”
A June 2021 report from DBRS Morningstar notes that the global growth of sustainable debt issuances has grown from less than US$100 billion in 2015 to around US$730 billion as of 2020, and was almost at the US$500 billion mark as of April of this year.
The Canadian experience
sustainable debt only came into the awareness of Canadian companies in 2019 when Maple Leaf Foods Inc. became the first domestic company to get a sustainability-linked corporate loan. Under the agreement with BMO Financial, Maple Leaf Foods would amend its existing credit facility to reduce the amount of interest if it met goals regarding the use of power and water, solid waste management, and a significant reduction in its overall carbon footprint.
Since then, a number of corporations have followed suit and the country’s sustainable corporate debt market is due to hit the $20 billion mark before the end of this year.
According to the Institute for Sustainable Finance (ISF) at Queen’s University, one out of every six dollars in Canadian corporate debt over the past year now includes linkages to sustainability measures. Indeed, the National Bank’s total exposure to loans with sustainability linkages hit $2.5 billion as of the end of October 2021, a notable increase from last year when its exposure only amounted to $274 million.
“What I observed was that a lot of these products were very small scale,” says ISF head of research Ryan Riordan, stating that early products had a “wait and see” or “watch and learn” tang. “Now, you’re seeing much larger deals: instead of it being for under $100 million it is for $1 billion or more.”
A word of caution
However, Riordan adds a caveat for any company looking to avail of sustainable debt instruments. He finds that the definition of the term “sustainability” itself is a bit too broad and could be misappropriated by some companies.
“[Sustainable business models have] cash flows that are greater than costs,” he said. “We are sort of stuck in this equilibrium though, where we call it sustainability and the problem is that people throw things under there that maybe I don’t think fit under there.”