Nordic corporates embrace sustainability-linked loans

The surging interest from companies in advancing their sustainability agendas is taking root in corporate treasury departments. Corporates are increasingly integrating environmental, social and governance (ESG) metrics into their financing, and sustainability-linked loans (SLLs) are rapidly becoming an instrument of choice.

Under this type of lending arrangement, a company’s borrowing costs are tied to its progress on meeting certain set and measurable sustainability targets. If the company meets those key performance indicators (KPIs), it gets a discount; if not, it pays a premium.

The entire company must live up to the targets in order to get the discount. In that way, such general-purpose SLLs are more versatile than green loans, which finance specific green projects.

Since the publication of the Sustainability-linked Loan Principles in 2019, interest in the format has taken off, with the Nordics at the global forefront. The Nordic market has grown to approximately EUR 11 billion in new issuance so far in 2021, compared to around EUR 6 billion in 2019. While Sweden and Finland have led the way in recent years, Denmark is rapidly catching up in 2021.

“2021 is when ESG became meaningful and tangible from a Danish corporate loan perspective,” says Henrik Immelborn, Nordea’s Head of Debt Solutions and Loans in Denmark.

A growing trend

Immelborn hosted a panel on sustainability-linked loans at the recent Cash & Treasury Management conference in Copenhagen, joined by representatives from Danish jewellery chain Pandora and supermarket cooperative Coop Danmark.

He kicked off the event with sobering news from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) 2021 report, which found that time is quickly running out to achieve the Paris Agreement goal of limiting global warming to below 2°C.

“We believe corporates are an important part of the solution. It’s encouraging to see that Danish corporates are acting now as we speak,” he said.

Shipping giant A.P. Møller – Maersk was one of the first movers in Denmark in 2020, linking its $5.0 billion revolving credit facility (RCF) to its CO2 performance. Pandora and Coop followed suit in 2021, both announcing their sustainability-linked loans on 29 April 2021.

“That was the day the broader trend really started in Denmark,” said Immelborn, describing growing interest from both mid-size and large corporates.

A ‘super easy’ process

Pandora’s sustainability-linked RCF ties its borrowing costs to its progress on two sustainability goals: becoming carbon-neutral in its own operations by 2025 and using only recycled silver and gold by 2025.

Kristian Skovfoged, Treasury Director at Pandora, described the process of setting up the sustainability-linked RCF as straightforward and hassle-free. After initiating dialogue with Nordea around two years ago, he said he contacted fellow panellist, Marissa Saretsky, Pandora’s Director of Corporate Sustainability, to figure out what targets to use.

“When you have a good ESG team, like we do in Pandora, linking the actual targets to the loan is more of a formality,” he said, adding that he then presented the targets to Nordea, and they were accepted.

“From a corporate treasury perspective, it’s been super easy,” Skovfoged said, also noting that the documentation is nothing to fear.

Confidence in the targets

Under Coop’s ESG-linked senior credit agreement, the sustainability component affects DKK 1 billion of the credit facility and links the credit margin to two objectives covering CO2 emission reductions and responsible supplier management.

Anne Holm, Group Treasurer at Coop Danmark, emphasized the importance of being confident in the company’s ability to meet the designated targets, while still ensuring that they are ambitious.

“As a treasurer, the worst thing is to not be fully aware of the company’s ability to fulfil the KPIs. You need to get confidence around that before you go into the documentation,” she said.

Pandora’s Saretsky noted that the same confidence is needed when it comes to the data that’s provided year-on-year to show that the company is working effectively towards achieving its targets.

“There’s assurance attached to the ESG data and KPIs. You have to have strong confidence in the data, that it’s right. Ideally you’ve been working on this for many years already,” she said.

Signe Frese, CSR Director at Coop, said the experience with the ESG-linked deal highlighted how the work is breaking new ground.

“I expected a clearer definition of what an ESG-linked loan is. I discovered that we’re very pioneering here in terms of setting the standards,” she said.

Nordea’s Immelborn agreed that the market is immature, lacking standards and definitions. However, the field is rapidly evolving.

“In sustainable finance, over the next few years, we’ll see a lot of innovation in the industry, new structures, harmonization and better data quality that will compel sustainability-linked loans,” he said.

What’s the motivation?

Immelborn asked the panellists what the catalyst was for embarking on an ESG-linked loan.

“If we hadn’t included ESG, I think our board would have been extremely disappointed,” said Pandora’s Skovfoged. “It’s something that’s becoming the new normal.”

In Pandora’s case, meeting the targets translates into savings of DKK 7 million per year, which isn’t “big money,” according to Skovfoged. However, the purpose is to push the company in the right direction by integrating ESG into its financing.

Immelborn noted that the question used to come up whether the potential savings were significant enough to justify such loans.

“I think we’re beyond that now. Too many stakeholders are asking, ‘What do you do as a company?’” he said.

In June, Peder Bach, Head of Nordea’s Large Corporates & Institutions Denmark, told Finans that he expected Danish companies to have sustainability-linked loan agreements worth around DKK 200 billion within three years.

Immelborn shared that optimism at the event, saying, “This is something that is here to stay. We expect a lot of activity to go on in the next period of time.”