Growth in sustainable debt has accelerated in recent years, with the rise of green and sustainability-linked loans and bonds helping to drive the development. While corporates in Sweden and Finland were first-movers, Denmark is rapidly catching up, with sustainability-linked loans inching towards becoming the new norm for corporate lending.
Someone ready to meet that demand is Isabella Frenning Willis, the new Denmark lead on Nordea’s Sustainable Finance Advisory team. She comes to Nordea with significant sustainability-related experience, most recently as a sustainability consultant at KPMG, where she advised companies on climate risk management, carbon footprints and sustainability reporting. Before that, she worked as an ESG manager at a Danish pension fund, MP Pension, gaining the investor perspective.
When it comes to her new role at Nordea, Willis says she’s looking forward to working with companies on choosing relevant ESG targets for their loans and bonds. Under sustainability-linked structures, a company’s borrowing costs are tied to its progress on meeting certain set and measurable targets. If the company meets those key performance indicators (KPIs), it gets a discount; if not, it pays a premium.
“What’s important in this role is the ability to work with the companies on ambitious targets that are relevant to their long-term position and contribution to the green and sustainable transition,” she says.
She emphasises that the KPIs need to be material and ambitious enough that the sustainability-linked loans and bonds live up to their labels.
So how do companies ensure that their KPIs are ambitious and material? Willis notes that these definitions are case-by-case based and constantly evolving.
“The market for green and sustainability-linked financing has been growing very rapidly in the last couple of years, but it’s still in its infancy. We have seen a massive leap in companies’ commitments to sustainability in the past decade, and what was considered good practise ten years ago is not necessarily ambitious enough anymore. I expect we will see the same dynamic in the debt market where what’s considered ambitious will be a moving target,” she says.
However, the fact that companies are interested in setting up their loans and bonds in this way is a sign of the increasing role that financing can play in enabling the transition and delivering on the companies’ sustainability strategies.
“They’re now at the point where their strategies are solid enough that they’re comfortable linking their financing to the achievement of these targets,” she says, adding that “this also shows how financially material companies’ sustainability performance has become.”
She points to ESG and supplier ratings as another example of the increasing interconnectedness between sustainability performance and financing. “Customers and investors have incorporated ratings for years, but goals of improved ratings are now also included as KPIs in financing platforms where they serve as a proxy for companies’ improvement in their overall management of sustainability issues.”
The KPIs have to deliver tangible progress relative to the bond or loan amount they are linked to.
The rise of external validation
Willis also notes that the trend is moving towards external verification of companies’ targets and sustainability performance data, as recommended by the Sustainability Linked Loan Principles. When companies set targets for greenhouse gas emission reductions, for example, it’s expected that corporate emission reduction targets are in line with the Science Based Targets initiative (SBTi) methodologies. More than just the gold standard, science-based targets have become the expectation, says Willis.
In addition, the European Commission’s proposed Corporate Sustainability Reporting Directive (CSRD) will require large and listed companies to obtain external assurance for their sustainability data from 2023 onwards.
“I expect a fair share of the large Danish companies will already start seeking external assurance for their 2021 sustainability data as a trial run to be ready when CSRD enters into force,” she says.
When it comes to targets, Willis emphasises that proportionality is key. The KPIs have to deliver tangible progress relative to the bond or loan amount they are linked to.
“It’s important that banks don’t just rubber stamp unambitious KPIs. At the same time, there has to be a balance where we’re guiding companies in the right direction, but aren’t asking things that cost multiple times the borrowed or issued amount to implement,” she says. “If a company’s full sustainability strategy can be achieved through a single transaction, it is probably the entire strategy, rather than the selected KPIs, that is not ambitious enough.”