In early December, UK water utility Thames Water became the first UK corporate to tie the interest rate it will pay on a revolving credit facility (RCF) to its score under the Global Real Estate Sustainability Benchmark (GRESB) for infrastructure.
The £1.4 billion revolver was arranged by BNP Paribas and runs until 2023 with the option of a two-year extension. If the firm outperforms its GRESB infrastructure score, the margin that it pays will be lowered and any financial gains put towards Thames Water’s charitable fund.
Tom Bolton, head of corporate finance at Thames Water, tells Euromoney that the firm is responding to investor demand.
“The feedback we have had from institutional investors is that they wanted to see increased reporting in the ESG [environmental, social and governance] area and to see that the business is buying into it on a cultural level,” he says.
The firm issued its debut green bond in March, a £705.1 million US private placement.
“The green bond was all about use of proceeds, but this is different because it has a pricing impact,” says Bolton. “It was also an opportunity to show our commitment to improve. We were looking to increase liquidity headroom anyway, so this felt like a good time to do it.”
GRESB is the ESG benchmark for real assets. In 2018, 904 real-estate funds and property companies, 75 infrastructure funds, 280 infrastructure assets and 25 debt portfolios were assessed in the GRESB data, which is used by more than 75 institutional and retail investors representing over US$18 trillion in institutional capital.
The largest sustainability improvement loan written to date was Danone’s €2 billion deal in April, which is linked to sustainability criteria assessed by environmental consulting firms Sustainalytics and Vigeo Eiris.
Thames Water’s RCF is the first loan to be linked to the GRESB infrastructure score; French real-estate investment trust Gecina raised a €150 million sustainability improvement loan linked to its GRESB real-estate rating through ING France in April.
Thames Water was ranked top in the water and sewerage category and seventh for infrastructure among the 280 infrastructure businesses that were evaluated worldwide.
It takes some time to come up with a structure that is feasible, but this is a fantastic way to align finance and sustainability- Emmanuelle Aubertel, BNP Paribas CIB
The top-scoring corporates in other categories were Adelaide Airport, Luxembourg-based rolling stock leasing company Alpha Trains, Australian midstream energy business Lochard Energy and New Zealand-based energy distributor Powerco.
Sustainability improvement loans were pioneered by Dutch electronics firm Philips, which wrote a €1 billion loan benchmarked by Sustainalytics through ING in April 2017.
Adoption of the concept has accelerated rapidly this year.
“It takes some time to come up with a structure that is feasible, but this is a fantastic way to align finance and sustainability,” says Emmanuelle Aubertel, sustainable finance product structurer at BNP Paribas CIB.
“One of its strengths is that you are not linking performance to a specific project, so the structure is much more holistic and repeatable.”
In May, BBVA arranged the first sustainable RCF in Italy for utility Hera. The loan has a price-adjustment mechanism linked to reduced CO2 emissions, increased waste recycling and reduced energy consumption – as verified by Vigeo-Eiris.
Linking the margin to the correct variable is crucial.
“We try to make sure that we are linking to a target that is relevant and meaningful to the client,” says Aubertel. “We generally have very long discussions with borrowers about this. Some say that they are most interested in linking to one particular area of their sustainability strategy and others say that having a good ESG rating is really important.
“We try to keep it simple, so would not generally look at linking to a target that is reviewed more frequently than annually.”
Bolton at Thames Water sees the value in a good ESG rating.
“Benchmarking to GRESB captures a much wider theme,” he says. “People have focused on our environmental impact, but we have also gone through a comprehensive governance review over the last year.
“When we presented this internally, the very clear focus was on how we can improve going forward not just about where we are now.”
In June, L&Q, a UK housing association providing accommodation for more than 250,000 people, wrote a new five-year, £100 million credit facility through BNP Paribas that is linked to the rate at which it puts tenants back into the workforce.
It is not clear exactly how much borrowers can save by using sustainability improvement loans. The cost of benchmarking to ESG ratings can be significant, as is the cost of monitoring performance.
Discounts and penalties for sustainable improvement loans tend to vary between 5% to 10% of the total margin. Given that interest rates are still at historic lows, that does not sound like much.
“The initial focus was on what the headline margin would be,” says Bolton. “We have a group of more than 10 banks, so we wanted a pricing structure that works for everyone. The margin will ratchet 5% to 10% around this level, but any benefit will be given to charity."
Donating the margin benefit to charity is a nice touch by Thames Water. It also demonstrates the extent to which initiatives such as this are very much driven by the demands of the investor side.
As much as borrowers have an economic incentive to report and improve their sustainability, the push for change is coming from lenders.