Sustainable Debt Financing in Canada: Loans Linked to Sustainability | Bennett Jones LLP


Sustainability Loans are loan products designed to reward a borrower with improved pricing for meeting pre-defined sustainability performance goals related to environmental, social and / or governance-related sustainability considerations. Now a preferred global asset class, sustainability-related loan issuance is estimated to have reached US $ 350 billion in global lending markets in the first half of 2021, according to a study by Bank of America, compared to US $ 197 billion. for the year 2020.

Introduced to the Canadian lending market at the end of 2019, sustainability lending has proven to be an attractive debt financing option for predominantly Canadian investment borrowers with incentives to reduce the cost of capital while passing on to investors. carefully planned environmental, social and governance (ESG) initiatives. The deployment in Canada covered a wide range of industries, from consumer food to power generation, construction to oil and gas. By accessing sustainability-linked loans (not only from institutional lenders but also from alternative lenders), borrowers and lenders have turned to Principles of sustainability loans for guidance, who have, through a few different iterations of the principles, standardized the key principles of sustainability-related lending in global markets, including Canada.

The Principles of sustainability loans

Given the global interest in sustainability-related debt products in general, the Asia Pacific Loan Market Association, the Loan Market Association and the Loan Syndication and Trading Association have collaborated to provide a voluntary framework for establishing sustainability loans. Originally published in March 2019, the Principles of sustainability loans were revised in May 2021 to better clarify the five essential components of a sustainability loan:

  1. selection of key performance indicators (KPIs);
  2. calibration of sustainability performance targets (SPT);
  3. characteristics of the loan;
  4. reports; and
  5. verification.

The principles of a loan linked to sustainable development

KPI, SPT and other loan characteristics

When entering into a sustainability loan, borrowers (usually in consultation with the syndicate lender (s) acting as sustainability coordinator (s) or sustainability structuring agent) select appropriate KPIs commensurate with the challenges of the borrower’s industry and business model. The borrower then calibrates ambitious and significant SPTs in relation to each KPI; each SPT should represent a significant improvement of the respective KPI. These substantial improvements can be assessed over the life of the loan through an external assessment, in the form of maintaining or improving a rating or rating assigned by an external rating agency on sustainability, or by KPIs determined internally and assessed internally or externally. linked to specific ESG objectives. The Principles of sustainability loansThe publication contains examples of environmental, social and governance key performance indicators, annexed to the documents. These examples include targeted improvement in environmental issues such as energy efficiency, waste disposal and greenhouse gas emissions, social issues such as affordable housing and employee engagement, diversity and inclusion, and governance issues such as business ethics and transparency. These SPTs can be translated more concretely into objectives involving, for example, a specific percentage reduction in GHG emissions, an increased representation of women on the borrower’s board of directors or in managerial positions and / or a specific percentage reduction in water consumption by the borrower.

Borrowers who meet stipulated SPTs are typically rewarded with price cuts or a lower cost of funds “ratchet” (as it is sometimes called) between 5 and 7.5 basis points within the applicable loan margins. , as determined by the characteristics of the loan defined in the credit agreement (or similar documentation). Likewise, although the borrower’s inability to achieve a given SPT does not result in an event of default under the credit agreement (or similar documentation), an increase in prices, or an increase in credit margins. applicable loan is likely to result.

A “double ESG click” in the form of an agency ESG rating metric as well as sustainability KPIs in lending documents (rather than either one) has recently been observed in European markets. loans, giving the borrower the flexibility to achieve their goals. (and an increased opportunity to potentially benefit from lower prices). A “flip-flop option” is also sometimes available in this market, with the borrower being able to choose one approach over another at certain times during the loan term. It may only be a matter of time before similar provisions are incorporated into Canada’s sustainability lending literature.

Reports and Verification

Annual reports and the annual external audit of borrower performance provide lenders with the information necessary to determine whether KPIs and SPTs have been achieved. While the previous iterations of the Principles of sustainability loans suggested that the external verification of the borrower’s performance in compliance with the SPTs was a point of negotiation between the borrower and the lenders, the Principles of sustainability loans suggest that independent and external verification should be a hallmark of the loan. Borrowers should nevertheless establish and maintain internal processes to assess the satisfaction of their sustainability loan SPTs.

While green loans have also become an arrow in the quiver of borrowers seeking sustainable debt financing in Canada, the loan proceeds are to be used only for green projects. The ability to deploy the loan proceeds for general corporate purposes under sustainability-linked loans provides flexibility to borrowers. This flexibility, along with the potential for price easing, makes sustainability-linked loans an attractive debt financing product for borrowers who are already actively pursuing ambitious ESG goals, looking to embed more sustainability into their credit chains. sourcing and seek to strengthen their overall sustainability profile.

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