Nature provides services that are estimated to be worth $125 trillion per year globally, yet there is a lack of awareness of potential debt issuers about how material natural capital is to their balance sheet and, by extension, the importance of factoring nature into capital-raising and borrowing plans.
The green bond and green loan principles do include biodiversity, and the Sustainability Awareness Bond criteria was expanded this year to include protection and restoration of biodiversity and ecosystems. Few issuers of these products, however, are allocating use of proceeds to Nature-based Solutions or the conservation or enhancement of biodiversity. Annual state of the market reports – such as Environmental Finance’s Sustainable Bond Insights 2021 (see p.21) – estimate a 5-10% market share for such bonds.
The TNFD will hopefully boost awareness, but debt capital markets bankers are encouraged to speak now with Treasurers about Nature-based solution (Nbs) and nature-related investments as a potential factor to consider within use of proceeds of green bonds. Given the cost of capital will be essential within issuer decisions, credit rating agencies could provide the signal needed by including key natural capital parameters in their credit rating analysis.
In the sustainability-linked loan product market there is a lot of untapped growth potential for loans with flexible interest rates linked to measurable and reported nature-outcomes. For example, interest rates are lowered as nature-positive KPIs are met.
However, in order for the interest rate ratchets to have real impact, nature targets need to be science-based and ambitious on an absolute (rather than a relative) level. The potential interest rate differential also needs to be material otherwise it will be considered as PR opportunity and not material to an issuer’s business strategy.
Central banks could help support the growth of such nature-positive products by providing cheaper capital (through credit lines to commercial banks). They could also provide interest rate support to domestic issuers that allocate use of proceeds to natural capital assets with interventions aligned with nature focused NDC targets, for example. Some of these ideas could be made mandatory for nature-based sustainability-linked products.
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RECOMMENDATION IN PRACTICE:
PUMA's ESG-linked RCF
In December 2020, PUMA SE, the world’s third largest manufacturer of sportswear, signed a €800 million ESG-linked syndicated revolving credit facility (RCF) – the company’s first to incorporate an ESG mechanism.
The syndicated financing led by ING and Bank of America is a further step towards the execution of PUMA’s plan to refinance the €900 million liquidity facility issued in May 2020 under the KfW programme.
In line with PUMA’s 10FOR25 (10 sustainability targets PUMA wants to meet by 2025), including shifting to 100% cotton, polyester, leather & down sourced from certified suppliers, the margin under the new facility is adjusted annually based on the performance against goals of certain KPIs in areas related to climate, plastic & oceans, biodiversity, human rights and water & air.
CEMEX's Sustainability-linked Loan
Mexico’s CEMEX, one of the largest cement producers in the world, issued its first sustainability-linked loan in October 2020 – $3.2 billion – with five KPIs including nature specific KPIs (implementation of water management plans for arid regions, boosting biodiversity and third party certification of active quarry sites).
UPM's Biodiversity and Climate-related RCF
In 2020, Finnish forest industry company UPM linked the pricing mechanism of an RCF to its biodiversity and climate-related targets. The margin of the €750 million RCF is tied to two KPIs: a net positive impact on biodiversity in the company’s forests in Finland and a 65% reduction in CO2 emissions from fuels and purchased electricity between 2015 and 2030, in line with UPM’s commitment to the UN business Ambition for 1.5°C. BNP Paribas acted as a sustainability coordinator for the facility.