A growing number of borrowers in Asia Pacific are getting loans whose interest rates are linked to meeting sustainability goals, in one of the few bright spots for a corporate lending market depressed by the pandemic.
The market for so-called sustainability-linked loans in Asia Pacific excluding Japan took off in 2017, and borrowers have steadily increased since then: 18 firms signed a total of $7.4 billion of such debt so far in 2020, compared with 16 companies raising $7.5 billion last year, according to data compiled by Bloomberg. Margins on the debt rise when a borrower misses green or social targets.
Loans overall in the region have plunged 30% this year as the pandemic made banks more reluctant to lend.
Rising interest in sustainability-linked loans comes as demand jumps for similar bonds that reward borrowers that achieve targets such as greenhouse gas emissions and employee training: global sales of such notes have surged almost 80% this year.
But, some investors have questioned whether putting money in those vehicles is all that ethical considering that debtholders are in effect rewarded when the borrower misses sustainability targets.
Others say that the debt is still worthwhile because it provides an incentive for borrowers to improve their environmental, social and governance performance.
“While step-up margins on sustainability-linked loans may raise concerns about banks earning more from failures of borrowers to meet ESG targets, the structure isn’t bad as such,” said John Corrin, head of corporate finance, international, at Australia & New Zealand Banking Group Ltd. in Hong Kong. “The point of the structure of these loans is that the targets need to be meaningful to the borrowers and lenders.”
The volume of sustainability-linked loans have stayed about the same level in 2020 as last year because the pandemic prompted companies to focus on immediate liquidity needs and limit other types of fundraising.
More deals are likely to come out of Asia. The pipeline includes food products firm Thai Union Group PCL, which is marketing an about $291 million equivalent facility to syndication.
Virus Outlook
The outlook for 2021 depends on Covid-19 and how markets reopen, as well as the enhancements of some regulatory frameworks and incentives, said Noemie Peiffer, chief operating officer for investment banking APAC and sustainable finance expert at BNP Paribas SA. “Overall, I am cautiously optimistic,” she said.
She sees potential in markets that are newer to sustainability-linked loans, such as Indonesia, Thailand and Vietnam.
Peiffer also hopes that India, which is active in renewables and green finance, will become more active in sustainability-linked loans. Green loan volumes for the country have more than doubled this year.