Updated: Mar 22
Many companies are aware sustainability can drive business value, but do not have effective sustainability programs to generate results. Most companies struggle with the following:
Companies cannot see how sustainable operations affect profitability
Companies become distracted with no 'real' incentive to meet their sustainability goals
Companies don't have buy-in from teams on aligned missions for sustainable progress
In 2021, sustainability is now driven by investors and financiers, as the rewards of focused sustainability efforts are calculated and clear. As evidence, the largest asset manager in the world, BlackRock, now asks 100% of its investments to establish sustainability plans to boost business profitability.
"81% of companies using sustainability reporting are outperforming the companies they are compared against."
- Larry Fink, CEO, BlackRock
Sustainable Finance takes sustainability reporting one step further, and helps companies generate profit by materially reducing operating costs and empowering real commitment to the company's environmental and social goals.
Companies using Sustainable Finance products are now:
Driving higher profits, as Sustainability-Linked Loan pricing falls lower than business loans market rates
Shrinking operating costs, as the company implements more efficient business energy processes
Fully-aligned, as the team works towards shared environmental and social goals of the business
Sustainable Finance Market:
The rise of Sustainable Finance (or ESG-Linked Finance, Climate Finance) over the past 3 years is staggering, and represents an opportunity for businesses to harness the power of sustainability to drive positive change and profits.
Sustainable Finance can be categorized into multiple products, from Green Financing, to 'Sustainability-Linked Loans' and Bonds. The distinction between 'green' and 'sustainable' financing is made in the 'use of proceeds'. Green Loans and Bonds must be used for approved 'Green' projects such as renewable energy installations and energy efficient buildings. Without 'use of proceeds' stipulations, Sustainability-Linked Loans (SLLs) and Bonds are advantageous in their ability to be used for general corporate purposes, much like a traditional business loan or bond. The lack of 'use of proceeds' restrictions allow Sustainability-Linked Loans and Bonds to be widely applicable across industries.
Companies now prefer Sustainability-Linked Loans as a source of financing, as they can use the funds for any business need, while empowering sustainability goals and reducing financing costs, as evidenced in the graph below.
What Are Sustainable Loans?
Sustainability-Linked Loans (SLLs) are similar to other loans, with the difference being the interest paid by the borrower. The loan interest rate is linked to agreed upon sustainability metrics, for example, carbon emissions, energy usage (kWh), or a more generic ESG target.
Borrowers who achieve their sustainability targets benefit from favorable interest rates, while a failure to do so will lead to higher rates.
SLLs provide an incentive for companies to align both financial and sustainable objectives.
As seen in the graph below, SLLs have exploded as a mechanism for businesses to drive sustainability, increasing 2,700% from $4B to $135B since 2017.
What Are Sustainable Bonds?
Sustainability-Linked Bonds (SLBs) operate similar to SLLs in that the bond pricing is tied to sustainability targets approved by the Issuer and Guarantor. Sustainability-Linked Bonds often have a coupon ‘step-up’ clause, meaning the coupon rate increases if the Issuer does not achieve their sustainability targets within the agreed upon time frame.
Sustainable Finance is best used as a tool to achieve sustainability targets, shrink operating costs, and boost customer/investor engagement.
Examples of Sustainable Finance:
Each month, more businesses use Sustainable Finance products to boost growth, achieve sustainability goals, and reduce financing costs. Recently, large corporations have leveraged Sustainable Finance to separate their brands from the competition.
In February 2021, cement manufacturer, Ultratech Cement Ltd. used Sustainable Finance to raise funds and improve its sustainability standing in a historically carbon-intensive industry. The interest rate of the financing is tied to Ultratech's greenhouse gas (GHG) emissions per ton of cement produced. The company's goal is to reduce emissions by 22% by 2030 to obtain better financing from the sustainability-linked financing.
In February 2021, clothing retailer H&M issued a $600M sustainability-linked bond, which drew in an astounding $4.6B in orders, making the bond offering 7.6x over subscribed. The coupon rate of the bond is tied to H&M reducing their greenhouse gas (GHG) emissions by 20% and increasing their use of recycled material by 30% by 2025. H&M's CFO stated "Sustainability is an integral part of our operations. This type of bond creates a clear and transparent commitment and incentive for the company."
In February 2021, AB InBev, the maker of beer brands Budweiser and Stella Artois, signed a $10.1B Sustainability-Linked Loan, the largest in the SLL market's short history. The interest rate of the loan is tied to AB InBev reducing their GHG emissions by 25% and consuming 100% renewable energy by 2025.
In November 2019, fashion designer, Prada, signed a €50M SLL based on its use of recycled goods and energy efficient buildings.
Sustainable Finance is not limited to large corporations. The examples stated above indicate market acceptance of SLLs and SLBs, but there is now massive opportunity for SMBs, middle-market companies, and large manufacturers to take advantage of Sustainable Finance to boost profits in 2021.
How can my firm implement Sustainable Finance?
Businesses can easily partner with a third-party ‘sustainability coordinator’, such as FreeWorld, to obtain Sustainable Financing. The sustainability coordinator helps to create, or verifies an existing, company sustainability framework. The sustainability coordinator then issues a ‘Second-Party Opinion’ indicating whether the sustainability goals of the company align with SLL and SLB industry guidelines, the Sustainability-Linked Loan Principles (SLLP) and Sustainability-Linked Bond Principles (SLBP). The sustainability coordinator works with the company and business lender (SLL) or guarantor (SLB) to establish agreed upon terms of the financing. Company sustainability is monitored over the life of the loan or bond, and the company benefits from lower interest rates or coupon rates as sustainability goals are achieved.
Sustainable Finance Marketplace: Businesses who wish to leverage a sustainability program and financing immediately can join a Sustainable Finance marketplace such as the FreeWorld Finance Marketplace. In the marketplace, businesses can create a simple sustainability program, submit financing applications, and get offers from a network of certified lenders offering competitive sustainability-linked loans. Each company's sustainability framework is verified by the sustainability coordinator and monitoring/reporting is provided by FreeWorld throughout the term of the financing. By joining a Sustainable Finance marketplace, a company can easily implement sustainability and Sustainable Finance in one place, and responsibly grow company profits in 2021.
Aside from reduced financing costs, sustainability and Sustainable Finance encourage lower operations costs from energy and resource waste. Energy costs are typically the 1st or 2nd largest operating costs in the manufacturing industry, so any improvement in the energy efficiency or energy consumption of company facilities leads directly to larger profit margins and more money in the business bank account. Sustainability encourages these process efficiencies, and Sustainable Finance incentivizes the company towards even greater savings.
Company identity improves with sustainability, as the vast majority of business leaders and employees agree businesses ought to have a more positive impact on the natural world. When teams align behind sustainability, they embrace how business should be performed, and in turn create greater commitment and investment into their business and collective mission. Company alignment should not be underestimated as a key factor in the 81% of sustainable companies outperforming their peers. Teams who bond over shared values and goals build happier, more productive, and more profitable businesses.
As businesses continue to utilize effective sustainability plans and Sustainable Finance produces, these companies are driving higher profits, shrinking operating costs, and increasing alignment within their teams.
Profit with Sustainability,