Sustainability loans risk becoming profit chasing by another name

Enterprising borrowers are getting creative with green loan targets, so they are better suited to their businesses. While the idea of a company giving itself a financial incentive to boost its sustainability is a good one, the goals companies are setting for themselves are not dissimilar from what they should be doing anyway.

  • By Mike Turner
  • 01 Oct 2019
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French food services firm Sodexo signed a revolving credit facility last week that rewards it with a cheaper margin if it reduces the amount of food it wastes. Sodexo’s chief executive, Denis Machuel, says the company aims to halve the 117,000 tonnes of food wasted each year “within our collective reach” and the company “strives to improve quality of life”. 

This is similar in spirit to Pearson’s revolver, from earlier in the year, that linked its margin to the educational publisher’s progress in educational reach. 

The United Nation’s fourth Sustainable Development Goal is to “ensure inclusive and equitable quality education and promote lifelong learning opportunities for all”.

At the time the revolver was announced, James Kelly, Pearson’s group treasurer said: “I could have made life very easy on myself if I had done a [loan linked to carbon dioxide emissions]. But we are mission driven to improve education and it felt like we had this unique opportunity… I had a degree of responsibility to take that challenge up.”

Kelly’s language reflects corporate high-mindedness, to say the least.

But before sustainability linked and green finance became ways to give investors warm fuzzy feelings, Sodexo’s and Pearson’s objectives — for a food company to waste less food, and an educational company to educate more people — were just the normal ways to increase business.


A greenwashing problem

Pearson’s loan is not being reviewed by one of the third-party sustainability ratings companies that have appeared during the green financing revolution.

In its official statement, Sodexo did not say if its deal was being reviewed by a third party, and did not respond to a request for details.

But proponents of the Sodexo and Pearson financings say sustainability ratings companies are limited in their scope and do not take into account the nuances of businesses that include social elements in their sustainability plans.

But that is exactly the point of these rating agencies. They should be limited in their scope, as they should only rate deals in which a company is taking action regarding sustainability that it would not otherwise have done.

For a food company to say it is increasing its sustainability by trying really hard to cut down on how much of its product it wastes, while still squandering 58,500 tonnes of food each year, or for an education publisher to boast that selling more educational materials serves a higher purpose, rather than either goal being fundamental to each company’s everyday business, is an affront to the idea behind socially responsible investment (SRI). 

These goals cannot be compared to a company cutting its carbon emissions, investing in greener technologies, or improving internal social metrics, such as gender equality or worker safety. 

Of course, it suits both lenders and borrowers to badge deals as “SRI”. But applying that tag when all that is really happening is that a borrower will pay less for its debts when it has greater ability to do so, is simply a basic concept of credit. Acting like it is a funding technique that can save the planet cheapens the SRI label.

Setting aside greenwashing, these deals tell us that borrowers hold all the cards in the loans market. Times are hard for banks’ loans desks, as volumes are so low. So it is the banks which are facing immediate sustainability threats with jobs at risk (if they have not gone already) as banks review how long they can continue these loss-making capers.

Now it seems they can no longer afford to be discerning when it comes paying borrowers for hitting targets that the borrowers should be aiming for anyway.

  • By Mike Turner
  • 01 Oct 2019

All International Bonds

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1 JPMorgan 380.40 1762 8.35%
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3 Bank of America Merrill Lynch 302.44 1301 6.64%
4 Barclays 271.64 1137 5.97%
5 HSBC 224.52 1238 4.93%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
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1 BNP Paribas 54.76 228 8.08%
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3 JPMorgan 33.93 98 5.01%
4 SG Corporate & Investment Banking 29.88 150 4.41%
5 UniCredit 29.88 159 4.41%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
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1 JPMorgan 13.16 82 8.29%
2 Goldman Sachs 12.58 64 7.92%
3 Morgan Stanley 12.18 55 7.66%
4 Citi 10.09 71 6.35%
5 Credit Suisse 6.93 38 4.36%