Boom in Sustainability-Linked Loans (SLL)

In the coming year, you will be hearing more about the concept of the Sustainability-Linked Loan (SLL). Sustainability Linked Loans differ from ordinary green loans in the sense that they can be used for general corporate purposes rather than for a specific purpose.

SLLs give borrowers the opportunity to apply the loan toward general business purposes as the terms are tied solely to the borrowers ESG-related performance and not the use of proceeds or the projects financed. This flexibility has made the SLL a popular alternative to traditional capital raising and debt.

What is a Sustainability-Linked Loan?

Sustainability Linked Loans are linked to the borrower’s sustainability performance measured against Environmental and/or Social and Governance criteria (ESG). Companies can leverage their ESG performance to improve their bottom-line and their company’s overall ESG performance through Sustainability Linked Loans.

The sustainability performance is thereby linked to the underlying margin of the loan, in relation to pre-agreed sustainability performance targets. Enhanced sustainability performance lowers the interest rate, thereby reducing financing costs; if the targets are not met, the interest rate may increase.

Popular in the U.S.

U.S. companies are increasingly converting their borrowings to sustainability-linked loans as the asset class finally takes off in the United States. U.S. loans with terms tied to ESG targets have jumped to about $52 billion in volume in 2021 through May 21, a 292% increase compared with all of 2020, according to Bloomberg data.

Birla Carbon closes $750 million SLL

Birla Carbon, which manufactures high quality carbon black solutions, has announced the execution of a $750 million Sustainability Linked Loan (SLL) on December 17, 2021, with a syndicate of more than 15 banks. The proceeds from the loan will be used to refinance the company’s existing debts. The ANZ Group is the sole sustainability coordinator for this deal.

Net zero by 2050

The announcement is of added significance as earlier in 2021, Birla Carbon announced the launch of the Continua™ brand of Sustainable Carbonaceous Materials (SCM) and its aspiration to achieve net zero carbon emissions by 2050. The company’s net zero announcement aligns with The Paris Agreement, signed as part of the United Nations Framework Convention on climate-change mitigation, adaptation, and finance. It also aligns with the World Business Council for Sustainable Development’s Tire Industry Project SDG Roadmap aimed at addressing health and environmental impacts associated with the life cycle impact of tyres towards a sustainable future.

Within the Aditya Birla Group, Birla Carbon is collaborating with sister companies to develop decarbonization initiatives through the Aditya Birla Science and Technology Center. Creating a league of partnerships with leading sustainability solution providers, the company is exploring new and advanced technologies that will be used to achieve its goal. Birla Carbon will also reference the Science-Based Target Initiative (SBTi).

Regarding the SLL, Dr. Santrupt B. Misra, Group Director, Birla Carbon, Director, Chemicals and Director, Group HR, said, “This Sustainability Linked Loan facility challenges the organization further to continuously explore sustainable and innovative solutions which will support our goals and that of our customers.”

Union Bank of India secures $1.5 billion SLL overseas

Earlier this year, Union Bank of India secured a sustainability-linked loan aggregating to a total syndicated facility of $1.5 billion (about Rs. 11,050 crore) from one of the leading trading corporates globally.

The loan was secured through the lender’s international banking division. Under the facility, the lender will include three Key Performance Indicators (KPIs) relating to a reduction in greenhouse gas emissions, responsible sourcing of metals and growing renewable power portfolio.

The sustainability-linked KPIs will have to be tested annually and verified by a third-party expert. Under this structure, the interest rate paid by the borrower on the credit facilities will decrease or increase based on the group’s progress on the three KPIs, said a statement from Union Bank of India.