How companies can align their operations and funding to hit sustainability goals
In this third article of a series, Adrienne Bloom, head of Asia Pacific financial institutions corporate banking at Bank of America, and Jennifer Cheung, head of Hong Kong corporate banking, explain how the bank works with clients to help them re-engineer their business and achieve their sustainability commitments.
Make no mistake. The amount of capital needed to achieve net zero emissions is immense. Haim Israel, global strategist and head of global thematic investing research, BofA Global Research, estimates that $150 trillion – the investment cost of decarbonisation – is needed over 30 years to achieve net zero.
Worryingly, due to rising interest rates and inflation, the estimate is likely to move higher.
As many companies across industries globally grapple with the associated costs of accelerating their transition to a more sustainable and low carbon operating model, the banking industry and the capital markets are playing a key role in supporting and financing this important shift.
Interest in green, social, sustainable and sustainability-linked (GSSS) finance continues to grow, with global issuance across bonds and loans again exceeding the $1 trillion mark in 2022 (after doing so for the first time in 2021) despite the slight slowdown from macro conditions including rising interest rates.
Bank of America provides financing that is linked to our clients’ core strategy and environmental, social and governance goals that are material to their respective businesses
Indeed, the sustainable finance market is proving resilient to tightening financial conditions and consequent volatility in bond markets, with global GSSS bond issuance hitting $540 billion in the first half of 2023 – up 16% on the same period last year. GSSS bond issuance is also expected to come in at $1.1 trillion across all currencies for 2023, according to BofA Global Research.
Within the GSSS asset-class, sustainability-linked finance, which differs from traditional use of proceeds bonds and loans, is attracting increasing interest, driving sustainability-linked bond (SLBs) and sustainability-linked loans (SLLs) issuance to $72 billion and $262 billion respectively in 2022. For the first half of 2023, SLB issuance was $35 billion and SLL issuance $88 billion.
“Bank of America provides financing that is linked to our clients’ core strategy and environmental, social and governance goals that are material to their respective businesses,” says Adrienne Bloom.
“Key performance indicators (KPIs) are embedded in SLBs or SLLs and we work with clients to ensure that the chosen KPIs are core and material to their business, and measurable, quantifiable, and the associated targets are credibly ambitious and diligently monitored.”
Short-term impact, long-term gain
As much as this market has been booming, there has been a slowdown in SLB and SLL issuance in the past year due to several factors. These include weak broader market conditions, increased scrutiny on the materiality and ambitiousness of the KPIs and targets, and investor expectations on tighter structures.
However, interest in green and sustainable financing continues to develop and momentum in this financing format is expected to continue as the interest rate environment stabilises.
International Capital Markets Association’s (ICMA) updates on SLB principals and the Loan Market Association’s further guidance on SLLs should also help improve investors’ confidence in these types of instruments. In Asia (ex-Japan) while overall loan volumes have fallen by 33.1% in the first half of 2023, GSSS lending has only declined 1.6%, evidencing the heightened focus for corporations and the demand-resilience of this format.
There are several reasons why it is important for companies and institutions that financing is linked to sustainability objectives. Companies are under pressure from stakeholders including shareholders, employees, customers, lenders and regulators, to make positive changes with regard to sustainability and demonstrate their commitment to responsible business practices. SLLs and SLBs provide further evidence of these goals to shareholders and also offer incentives for meeting agreed sustainability targets.
From a bank perspective, SLLs are also a valuable tool for helping clients transition to a low carbon economy and support their own publicly stated environmental and social commitments including net zero goals.
Playing a critical role
Bank of America is one of the leading global sustainable bond underwriters. It was one of the original authors of the Green Bond Principles, a guideline developed by ICMA, and recently hosted the pre-conference workshop with ICMA on the Global Conference of Principles in Singapore as a member of the executive leadership. The bank is also experienced at guiding clients throughout the low carbon transition process.
As a global bank we see the full scale of what is going on in the market and we have a critical role to play in terms of advising our clients on the transition to low carbon that is unfolding
In making public commitments around net zero, something that Bank of America is also leading on, banks are relying more on material, non-financial information of ESG disclosures in decision-making around capital deployment. Increasingly, companies that put in place robust strategies addressing ESG risks and increased disclosure are better placed to access capital at potentially lower cost. This lower cost of capital reflects investors’ confidence in companies with better risk profile.
“As a global bank we see the full scale of what is going on in the market and we have a critical role to play in terms of advising our clients on the transition to low carbon that is unfolding,” says Jennifer Cheung. “The ISSB standards launched in June 2023, now provides a global base line on sustainability-related disclosure, will largely enhance the market transparency and investor confidence and promote the growth of sustainable finance.”
Governments have a role to play too. In the US, for instance, The Inflation Reduction Act (IRA) is providing incentives for investment in renewable energy – wind solar, hydrogen, biofuels, EV, land use, construction, equipment and also mining and processing of 50 different minerals needed for EV. All this, it is hoped, will help reduce carbon emissions in US by 40% by 2030, and provide $369 billion in programs over the next 10 years. Importantly in a global context, this also opens up the opportunity for foreign companies to qualify for these concessions, if they manufacture in the US.
Governments elsewhere are responding to this. The UK and Europe, as well as some Asian countries, are moving to ensure the regulatory and business framework in their countries can become self-sufficient in the transition to net zero.
In turn, the global trend around decarbonising will accelerate, supported by growing amounts of capital being allocated to sustainable investing and an increased focus on reporting requirements, particularly around climate risk.
From a strategic perspective Bank of America is working with clients to help re-engineer their business for the low carbon economy. Our sustainability advisory and financing solutions team support clients in strategic positioning, such as decarbonisation strategies, net zero targets, and reporting disclosure.
The bank’s experts strive to help clients to enhance their disclosure quality to demonstrate their progress on achieving their stated sustainability goals, thereby providing greater confidence to lenders and investors.
This includes emphasis on addressing labelling concerns raised in the market by investors and lenders. As a financing advisor and an issuer, Bank of America is mindful of such risks and is highly committed to addressing such concerns.
“Our experts leverage their experience to guide our clients to adopt the best practice outlined in the latest ICMA and Asia Pacific LMA principles, mitigating risks associated with greenwashing,” says Cheung.
The following are some examples of clients who have worked with Bank of America to raise funds that align with their sustainability objectives.
A healthy outlook for syndicated sustainability-linked loans
Bank of America acted as mandated loan arranger and sustainability coordinator for two three-year sustainability-linked loans worth a total of $320 million for the offshore subsidiaries of Tata Power. The first was a $195 million club loan, and the second a $125 million bilateral loan.
The KPIs include no additional investments in coal-fired power generation and setting up of up to 2GW of renewable energy capacity per annum.
This is the first SLL issuance from an Indian independent power producer. There will be an annual measurement of KPIs by accredited agencies during the three years of the loan period. Achievement of KPIs will lead to agreed credit spread adjustments.
Driving interest in green and social projects finance
Bank of America was one of the mandated lead arrangers, bookrunners and sustainability structuring banks for a $400 million, three-year green term loan for Geely Automobile Holdings.
The proceeds of the deal – the first such loan to be taken out by a Chinese automobile manufacturer – have been earmarked for financing eligible green and social projects, mainly promoting sustainable mobility and low carbon transportation.
The next steps
SLBs and SLLs are becoming an increasingly important component of corporate finance for companies committed to achieving their sustainability objectives.
Working with a global bank that has a demonstrated track record in matching funding and global investors and leveraging local and global expertise to drive specific environmental, social and governance goals is crucial to securing the most favourable terms while ensuring client objectives are met for both funding and sustainability outcomes.
This is the third and final article in a series to explore and illustrate what corporates can do to incorporate sustainability into their treasury operations, particularly as part of their digital treasury strategy and leverage sustainability into financing to meet their sustainability commitments.
Read the other two articles here: