Page 51 - Vol 33 Issue 34 2021

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from a lower interest rate if it achieves the Presently, anything between one and four has a number of wide-ranging advantages for
sustainability targets linked to the three- SPTs are being agreed upon, with most funding borrowers and lenders, such as:
year unsecured note. These targets include transactions seeing the borrower commit to one » building stronger, values-based relationships
reductions in energy consumption and total or two SPTs. with shareholders
carbon emissions, procurement of renewable Performance against the SPTs needs to be » having a positive impact on reputation and
energy and improvements in water efficiency. monitored and reported. Depending on the credibility
» The City of Johannesburg Municipality in nature of the SPTs and the information available » incorporating ESG performance into lenders’
its listing of the first green bond on the to assess these (e.g. utility bills), the borrower may credit assessments
Johannesburg Stock Exchange, where be able to self-report. However, most funders will » enhancing a borrower’s ambitions on ESG
proceeds raised through the issuance were want a third party to verify the accuracy of such performance
used to finance the City’s green initiatives. report or have a third party (such as an auditor or » engaging lenders to incentivise and support
a specialist agency) perform both the monitoring material sustainability improvements by
Our expectation is that incorporating ESG-linked and reporting. actively directing capital towards borrowers
financing terms will become part of mainstream Some SLLs include an ESG rating that needs implementing robust sustainability strategies
financing transactions in the near future. to be achieved or maintained, with an external » showing commitment to achieve
Developments in other markets, certainly point in rating agency issuing a certificate on an annual sustainability goals with a correlated
that direction. basis against which the SPT is measured. economic impact
Given the flexible nature of SLLs, borrowers Depending on the size of the transaction and » promoting sustainable long-term growth and
in other markets have also viewed SLLs as the number of credit providers involved, one of profitability
transition tools and have been more likely to take the financial institutions may act as a sustainability » increasing ability to attract and retain staff
up SLLs than green loans as a first step towards co-ordinator, with its role being to obtain all the who see SDG contribution as an important
sustainable financing. relevant information to assess the borrower’s part of their personal and working lives.
current ESG performance and develop the
Pricing and role players appropriate SPTs for inclusion in the transaction. Conclusion
Whereas the pricing on a green loan or bond is The sustainability coordinator may also have ESG and the related financing initiatives are
typically fixed, SLLs usually incorporate a margin an ongoing role in monitoring compliance and having a significant impact on economies and
ratchet which operates in conjunction with the assessing the ESG-related reports provided by the corporate world; and we anticipate that
borrower’s performance on pre-agreed SPTs. the borrower. green loans and SLLs will continue to positively
The borrower benefits from a lower interest influence the public and private sector, enhance
rate if it meets the SPTs in the given timeframe. Benefits impactful corporate behaviour and encourage
In some instances, it may need to pay a higher Companies are increasingly devising green the introduction of new regulations aimed at
margin if it fails to meet the SPTs. Testing of and sustainable strategies, incorporating them improving sustainability. It’s an exciting time for
the borrower’s performance against the SPTs is into their business strategies and aligning the lending market, one that presents a wide
usually done on an annual basis, with the pricing their funding mechanisms to their green and range of beneficial opportunities for all members.
increase or decrease applying to the loan over the sustainable development commitments.
next 12-month period. Entering into a green loan or SLL in this context

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