In 2017, Amsterdam-headquartered ING Bank issued a €1 billion loan to health technology firm, Philips, creatively linking flexible interest rate margins to the group’s sustainability performance and ratings. The deal marked the world’s first sustainability-linked loan (SLL), which differentiates the structure from other forms of traditional green finance, including green bonds and green loans, by offering very few restrictions around the use of the proceeds. .Thank you for reading this post, don't forget to subscribe!
Six years later, SLL has grown into a $240 billion global market, industry guidelines and principles are actively released and updated and participants from Asia Pacific frequently attend the event.
As a leader in SLL and other sustainable finance products, ING Bank plays a key role in helping European corporates expand into the Asian market, as well as facilitating the sustainable growth story of local companies.
FinanceAsia sat down with Singapore-based Andrew Chew, APAC Director of Sustainable Finance at ING Bank, to get his perspective on the progress of Asia’s sustainable finance market. He shared that, although there may be some bumps along the way, Asia’s efforts in the area of sustainability are making their mark on the global stage.
Excerpts from the interview have been edited for clarity and brevity.
Q: Six years in the development of Asia’s SLL market, what is the most noticeable?
For one thing, standards have become higher and more harmonious. We have become very familiar with SLL structures ranging from one or two banks participating in such issues to the entire banking community. Industry guidelines, such as the SLL Principles, which have been co-drafted internationally by the Asia Pacific Loan Market Association (APLMA); London-based Loan Market Association (LMA); and the US-based Loan Syndication and Trading Association (LSTA), providing guidance to banks to structure accordingly. Then there is an element of external review, where additional parties can provide their opinion in terms of whether the SLL structure aligns with the industry.
The standards are getting higher and tougher, which is a good thing. I’m sure if we were having this conversation three years from now it would be materially different again.
Q: How has the high interest rate environment affected the sustainable finance market?
It has been a bit of a challenge in terms of declining interest margins. If you think about the size and magnitude of SLL’s margin discount, companies may be less motivated to take action.
A reduction of five basis points from an interest rate of 2% in the previous low interest rate environment is significant. But now we are talking about 4-5%, where a five-basis-point cut is having little impact on corporates.
But companies still want to show their stakeholders that they are taking action on sustainability issues, and adopting SLLs is one way to do so. This helps to motivate the entire internal organization by linking financial benefits to the achievement of certain goals, rather than leaving these goals solely to the ESG department.
The motive for corporates to pursue SLL is to place higher stakes in reaching ESG goals and gain interest margin benefits.
As with financial markets as a whole, the success of green markets is largely determined by macro conditions. Green bonds or sustainability bonds are first and foremost bonds. And this means that when purchasing a bond, investors expect to receive it at a price that is commensurate with the risk taken.
Once macro conditions return, we will see an increase in overall durable bond volumes and loan volumes. Overall, whether it is benign or restrictive market conditions, I am confident that the proportion of green, social stability and sustainability-linked (GSSS) bonds among all financing instruments will begin to increase.
Question: Are investors still willing to pay “Greenium” for access to sustainability structures?
What we saw with the recent project finance issuance of the Hong Kong Mortgage Corporation (HKMC) is that investors prefer the stability tranche more than the plain vanilla.
For this transaction, both tranches were similar in terms of all traditional risk metrics including cash flow priority and extent of overcollateralization. The only difference was the label of the stability tranche compared to its equivalent conventional tranche, resulting in the yield of the former being ten basis points lower than the latter, which was substantial.
It served as a controlled experiment to test investors’ appetite – whether there are those willing to tolerate lower returns because of the positive environmental and social impact associated with a sustainability tranche.
We believe this is part of a larger trend in the investment industry. Traditionally, investing has always been about risk and return, but now in the last five to seven years a third factor has come into play – we are adding “impact” to the mix to become a three-factor decision-making equation. Are. This reflects a major change in investor interest.
Despite the various intangible benefits of a sustainable finance instrument, companies are nevertheless pragmatic when it comes to acquiring it, and look for real pricing benefits to find out how much they can gain from such products. Asks about. The HKMC deal has established a reference benchmark for future green and sustainable finance product issuances, as well as a quantitative greenium market proof point for future issuances.
More broadly, the opportunity for Hong Kong to become a green and sustainable finance hub is huge. Having a sovereign entity like the HKMC provide a market reference benchmark to which all GSSS issuers will point will only serve to strengthen this position.
Q: Are you concerned about greenwashing? How can this issue be addressed?
Absolutely worried. It is the accurate labeling of sustainable projects and assets that will enable capital to move towards a world where global warming is limited to 1.5 degrees. If this labeling is broken, incomplete, or worse, its credibility is questioned, financiers and investors will “throw the baby out with the bathwater” and avoid this space altogether. As a result, capital will not be effectively channeled to fight climate change.
Having a reliable classification is first and foremost. We need a definition system that clearly outlines what can be classified as “green” and what cannot, so that investors and financiers can know where to invest more or less while meeting any associated disclosure requirements. , to be able to take informed decisions about it.
Asia is fragmented with different markets and different jurisdictions, and it is important to have sufficient consensus on a unified taxonomy to bring clarity to investors.
Efforts should be made not only by governments, but also by industry working groups to help develop guidelines to define what is a credible SLL or credible green bond.
Q: Are you seeing any other trends developing?
There is now an interesting trend in the market called “greenhushing”, where companies are still setting their own sustainability goals, but in order to avoid scrutiny and criticism during the process, they are taking a more thoughtful approach in their marketing efforts.
The trend has gone from everyone jumping on the green finance bandwagon to swinging to the other side of the pendulum after a few high-profile cases of greenwashing. Companies are stepping back to adopt a more robust approach, and ultimately, this will lead to higher industry standards and a more reliable market.
There is definitely more hesitation for companies to obtain SLL. It takes more time to structure and complete an SLL – it requires a longer period of effort. The process which earlier took three months can now take six months or a year.
Our estimate for the volume of SLL issuance this year will be more or less the same as last year. We’re getting to a point where the road is a little bumpy. But if we look at it in three or five years time, things will get better. The sector is going through a recession at the moment due to high standards, but once we get through this consolidation period, it is poised for future growth.
Climate adaptation is another big trend we are seeing compared to current climate mitigation efforts to reduce carbon emissions to achieve climate goals. Although curbing global warming is a long-term goal, whether you like it or not, climate change is upon us. Extreme weather conditions are already having an impact – storms, floods and sea level rise are occurring with increased frequency and intensity.
Looking to the next three years, more sustainable finance will be released where the focus will be on climate mitigation as well as climate adaptation.
Q: What are your suggestions for corporates who are still in trouble?
Don’t let perfection get in the way of good. Start first.
Many companies are hesitant and remain on the sidelines, waiting for the “perfect” climate strategy. Instead of waiting five years to execute the perfect plan, start early and make improvements along the way. There is no time to lose.
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