Austrian and German borrowers opt for a guten tag
Societe Generale takes a prominent role in first ESG-linked loans in Austria and Germany.
Two large loan facilities completed in December 2018 marked the first-time use of environmental, social governance (ESG) ratings in loan agreements by Austrian and German borrowers, in the form of a five-year, €500m revolving credit facility for Verbund and a same-term, €1.5 billion revolver for Henkel, respectively. Societe Generale was the ESG coordinator for Verbund and a bookrunner on the Henkel deal.
The cost of the revolver for the Henkel loan facility is linked to the company's ESG performance, as judged by Ecovadis, ISS-oekom and Sustainalytics.
The introduction of variable margins linked to ESG ratings or performance has been emerging in Europe over the last 18 months, according to Laurent Vignon, head of European loan syndication at Societe Generale in Paris. Put simply, the margin in the loan agreement varies depending on a borrower's ESG performance, which can be measured either by its ESG rating, or by the integration of corporate environmental and social key performance indicators (KPIs), or, in some cases, a combination of both techniques.
The Verbund deal was the first syndicated loan with a margin varying solely according to the borrower's ESG rating, with SG's role demonstrating its commitment to innovation in the development of sustainable finance. The bank's role in the landmark transaction is a further endorsement of the borrower's sustainability strategy. The linking of ESG to loan agreements "improves the long-term health of a company, which is beneficial," according to Mr Vignon.
Corrective measures attached to KPIs were included in a loan for the first time in December 2017, when Fromageries Bel signed a €520m, five-year revolver that included three conditions, one of which was a reduction of the company's greenhouse gas emissions, according to Sandrine Enguehard, head of impact structuring at SG CIB in Paris. The agreement includes a virtuous obligation of result, with non-achievement resulting in corrective measures through direct investments or financing of associations or non-governmental organisations.
While companies in France have seized on the development of sustainable finance, the take up in Germany has been slower, partly due to the completion of a spate of refinancing in 2016.
With the corporate sustainability agenda becoming a strategic, long-term component of financing strategies, there is a trend for banks to finesse the link between a company's corporate social responsibility and treasury teams.
Sustainalytics, the ESG rating provider for the Verbund deal, published a new methodology in September 2018, adopting a risk rating that measures the magnitude of a company's unmanaged ESG risks. ‘As the ESG market matures, and data quality improves, clients are now seeking ESG ratings that are more focused on the specific ESG risks that companies are facing, and whether companies are effectively managing these risks,' explained the company.
The new approach, which operates in parallel with a previous system that was based on exclusions and best in class, is a response to a desire for more ‘materiality', whereby companies are rated rather on financially material risks, according to Jean-Claude Berthelot, an associate director in sustainable finance solutions at Sustainalytics in Amsterdam.