Corporate issuers considering fixed-income and loan financings are in all probability exploring ESG-related options. Unquestionably, interest in green, social, and sustainable finance is increasing.

To get started, let’s agree, for simplicity’s sake, to adopt the catch-all term “sustainable finance” when referring to any bond or loan aimed at ESG (environmental, social, and governance) financing.

To date, the most developed segment of sustainable finance is green bonds. Green bonds are fixed-income securities whose proceeds should be exclusively earmarked for projects or activities promoting climate or other environmentally sustainable purposes.

John Bolger, SMBC Nikko Securities America

Last year, green bond issuance surpassed the $250 billion mark, up from only $2.6 billion raised in 2012. Today, the sum-of-the-constituent-parts comprising the Bloomberg Barclays MSCI Global Green Bond Index represent a market value of $460 billion.

Though a newer market, green and sustainability lending could surpass in size the green bond market.

Importantly, prospective corporate issuers and their executives, particularly chief financial officers, corporate treasurers, and even chief executive officers, need to have a clear picture of the new responsibilities — as well as the opportunities — associated with issuing bonds or establishing a loan using sustainable financing, whether it be for green, social, or sustainable initiatives.

Guidelines and Disclosures

Fortunately, a universal set of guidelines exists to set C-suite executives on the proper course to capitalize on the opportunity presented by sustainable financing. The International Capital Market Association (ICMA), a not-for-profit group headquartered in Switzerland representing member firms in the global capital markets, has assumed a leadership role with the introduction of a set of Green Bond Principles — for green, social, sustainability, and sustainability-linked transactions.

Erik Gibbons, Sumitomo Mitsui Banking Corp.

These principles are voluntary guidelines recommending transparency and disclosure and promoting integrity in the development of the ESG-related bond market. They are useful to issuers, investors, and underwriters. For issuers, they provide guidance on the key components involved in launching a credible green bond. For investors, they ensure necessary information is made available for evaluating the environmental impact of the proposed green bond security. And for underwriters, they standardize a set of disclosures to facilitate transactions.

To illustrate, let’s review the ICMA’s Green Bond Principles’ four key components: 1. use of proceeds, which should be clearly stated to be for environmental improvements; 2. process for project evaluation and selection; 3. capital allocation tracking; and 4. meaningful reporting by which issuers record and retain readily available current information on the use of proceeds and provide a complete list and description of each funded project. Reporting should be renewed annually until all capital is committed.

Most corporate issuers of green bonds adopt a green bond framework, which is a well-recognized method for explaining to all key stakeholders how the company plans to fulfill its voluntary commitment to the Green Bond Principles. The ICMA provides a similar set of principles and framework for transactions earmarked as either social, sustainability, or sustainability-linked. A similar set of green loan principles has been established for the global loan market under the tripartite auspices of the Loan Market Association, the Loan Syndications & Trading Association, and the Asia Pacific Loan Market Association.

ESG Financing Advantages

Sustainable financings come with discernible advantages. These include the financing of sustainable projects and incentivizing corporate sustainability improvement; demonstrating vertical market leadership by addressing the major ESG issues; targeting the financial instrument to support a meaningful corporate social responsibility (CSR) strategy that increases awareness for the issuer’s stated ESG priorities; enhancing the issuer’s credit profile by beginning to remedy ESG risks that may have perceived material financial impacts in the view of credit rating agencies; communicating to investors and all stakeholders efforts to address ESG risks; expanding the investor base to include funds and institutions with an ESG mandate; and achieving better transaction pricing.

To illustrate how this works in practice, take the example of Prologis, the global logistics and warehouse real estate investment trust. Recently, SMBC Nikko Securities America, the broker-dealer of SMBC, was an active bookrunner in the JPY 41.2 billion Prologis’ global yen bond offering that included JPY 5.3 billion in 10-year green fixed notes and JPY 13 billion in 15-year green fixed notes, representing 44% of the total financing. The five-part transaction fulfilled Prologis’ capital-raising objectives at extremely attractive coupon rates, with proceeds from the two green tranches earmarked for eligible green projects.

Prologis has an established green bond framework, disclosing to all key stakeholders a detailed roadmap on the four key components presented in the ICMA’s Green Bond Principles.

More recently, the loan capital markets team of SMBC acted as active bookrunner, administrative agent, and sustainability agent for a JPY 55B revolving credit facility for Prologis, which provides funding for general corporate purposes under a sustainability-linked loan. This revolving credit facility has an ESG component linked to the percentage of Leadership in Energy and Environmental Design (LEED)- or other sustainability-certified stabilized development projects in the company’s portfolio.

The investor market for sustainable bond financings includes both pure institutional holders, like insurance companies, and fund managers with ESG-sleeve investment products. They are sophisticated investors and expect issuers to be ready to document and report on capital allocation. Similarly, tapping the global syndicated loan market requires a high level of preparedness. In either case, corporate issuers need to be prepared for the scrutiny in order to capitalize on the opportunity.

John Bolger is managing director, debt capital markets, at SMBC Nikko Securities America, and Erik Gibbons is managing director, loan capital markets, at Sumitomo Mitsui Banking Corporation.

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