13-09-2022 09:00

Sustainability in finance: Experiences one year down the road

If 2021 was the year ESG-linked financing started to catch on among Danish companies, 2022 was the year it became the norm. Treasury and sustainability experts from leading Danish companies recently gathered at the Cash & Treasury Management Conference in Copenhagen to share their experience and practical advice when it comes to integrating sustainability into corporate financing.
Photo of panellists on the Sustainability in Finance panel at the Cash & Treasury Management Conference in September 2022

What have borrowers learned over the period of living with an ESG-linked loan? At the recent Cash & Treasury Management Conference in Copenhagen, Henrik Immelborn, head of Debt Solutions & Loans, Denmark at Nordea, brought experts from DSB, LEO Pharma, ISS and Ørsted together to discuss their practical experiences and share advice.

Integrating sustainability into corporate financing is rapidly becoming standard practice in the Nordics. In Denmark, 2021 was the year ESG-linked financing started to catch on among Danish companies, and in 2022 it has become the new normal with the majority of new large long-dated corporate credit facilities containing a sustainability link.

The panellists all have expertise from companies that have embarked on ambitious ESG journeys with their sustainable financing. Most of their loan KPIs are environment-related, for example, with defined targets on greenhouse gas emission reduction. However, LEO Pharma has also captured the “S” in ESG, including a target to increase gender diversity in management.

A snapshot of companies' sustainability-linked loan targets

Sources: Ørsted: Sustainability report (2021, p. 55) and company announcement (Nov. 2021); LEO Pharma: Sustainability report (2021, p. 2 & 7) and company announcement (Nov. 2021); Pandora: Sustainability report (2021, p. 15); DSB: Annual Report (2021, p. 88).

What is a sustainability-linked loan?

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

In 2021, Nordea predicted that Danish companies would have sustainability-linked loan agreements worth around DKK 200 billion by 2023. Halfway through that forecast period, the total value is already at 56% of that forecast.

“There’s good hope we’ll close that gap in the next 18 months,” says Immelborn.

Pressure to integrate ESG into corporate financing

All of the panellists emphasised the increased internal and external expectations for companies to advance the ESG agenda, including through their financing decisions.

In the case of LEO Pharma, the impetus for the sustainability-linked loan came from the finance side of the company, according to Director of Global Sustainability France Bourgouin.

“Having that financial incentive, and how investors perceive it, creates a strong platform internally,” she said. However, she said, the pressure is coming from all angles and in different ways, including from the owners, employees and clients.

Ida Krabek, Head of Global Sustainability at Ørsted, said she does not expect companies’ commitment to ESG to decline, despite current global challenges from the energy crisis, inflation and geopolitical tensions. While businesses are under significant pressure in the current economic environment, awareness of the urgency of the climate crisis will not go away, she said.

Eske Hansen, Head of Treasury at DSB, added that while companies will likely be hit in the short term, for example by shortages in the supply of materials or equipment, and may need to readjust their plans, “in the longer run, the ESG movement is here to stay,” particularly given the evolving regulatory landscape.

What about the “S” and the “G”?

Targets in sustainable finance have historically focused on the E in ESG. Climate change is a global issue, and with the Greenhouse Gas Protocol and environmental reporting standards, the E sphere is more mature than its S and G counterparts.

“There’s increased discussion of the S versus the E. But we need to careful about not pitting the S against the E,” said LEO Pharma’s Bourgouin. “Discussions about climate change clearly highlight the societal impacts of climate change, such as displacement caused by flooding. We’re very aware of the human impact. The E and S are interlinked.”

The question is how to find the right metrics for social impact. In 2021, when refinancing its loan facility, LEO Pharma set not only E targets on carbon reduction but also an S target for increased gender diversity in management.

Kristian Skovfoged, Head of Treasury at ISS and previously Head of Group Treasury at Pandora, noted that while such gender diversity targets may be easier to quantify, broader social initiatives are more difficult. Facility management services company ISS, for example, often employs immigrants, helping them get a foothold in a new society with a job so they can learn the language, advance their qualifications and build a better life. The challenge is finding a social impact target that’s easy to measure and understand, he said.

Immelborn reported that around two-thirds of the targets in the loans Nordea facilitates are focused on the E. The rest tend to focus on the S, with only a small portion on G. He noted that G-related targets are tricky, as borrowers are generally expected to have good governance in place.

“It’s hard to subsidise interest rates just because companies have zero tolerance for bribery or child labour,” he said. “That falls under the license to operate. You need to have the basics in place.”

Nordea's Henrik Immelborn, Head of Debt Solutions and Loans, Denmark at Nordea, moderated the sustainable finance panel at the 2022 Cash & Treasury Management Conference in Copenhagen.
"We need to be careful about not pitting the S against the E in ESG."

France Bourgouin, Director of Global Sustainability, LEO Pharma

Steering clear of greenwashing

Ørsted’s Krabek noted that greenwashing continues to be a serious problem and a consequence of the fact that sustainability issues are highly complex and can easily succumb to embellishment for branding purposes.

For Bourgouin, the answer lies in the data.

“If we can focus on the data and let the data tell its story, we’ll be in a better position. The fact that ESG has such a strong data-driven approach gives us a better opportunity to tell accurate stories with transparent reporting,” she said.

ISS’s Skovfoged warned against linking the discussion of sustainable finance targets to greenwashing.

“You can easily miss a target or two in your RCF (revolving credit facility) and still be on the right track from a company perspective,” he said.

Top advice for embarking on an ESG-linked refinancing

The panellists ended the conversation by each sharing a piece of advice:

DSB’s Hansen: Understand the organisational context. Go and have lunch with your sustainability colleagues. Do your factfinding. It’s not rocket science.

Ørsted’s Krabek: Make sure you have a thorough discussion on the KPIs you set up.

ISS’s Skovfoged: In most companies, the targets need to be anchored with the board. It is a process.

LEO Pharma’s Bourgouin: Don’t underestimate how long it takes. Setting a climate target can take a year and a half.