Sustainability takes center stage in international investment decisions
In line with the growing sustainability agenda, banks are prioritizing various incentives within the scope of environmental, social and governance (ESG). The environmental loans offered by banks under ESG include two different options. The first option, income utilization loans, which provide financing for predetermined green assets, can be used to finance renewable energy production facilities. Sustainability-related loans, which are the focus of this article, are the second type of ESG loans offered by banks. The purpose of these loans is to enable companies to accelerate their climate efforts by creating financial incentives in line with their corporate strategies. An example of this is offering a lower interest rate when set sustainability targets are achieved.
In this context, sustainability-related lending aims to strengthen environmentally and socially sustainable economic activities and transformations. Sustainability-linked loans can include any credit instrument or contingent facility (such as bond lines, guarantee lines or letters of credit) that incentivize borrowing companies to achieve ambitious, predetermined sustainability performance targets.
According to Bloomberg's report, the first sustainability-linked loans emerged in 2017, providing $49 billion in financing globally through 2018. Total disbursements between 2017 and 2020 amounted to approximately USD 325 billion, and volumes continue to grow rapidly.
Nordic Investment Bank (NIB), an international financial institution founded in 1975 by five Nordic countries, is making significant strides in sustainability-related lending. "NIB wants to promote ambitious sustainability transitions and high quality standards in the fast-growing sustainability-linked lending market," said Joe Wright, head of business development at NIB, emphasizing the bank's commitment to ESG investment. According to Bloomberg, between 2017 and October 2021, NIB made 85 sustainability-linked loans in the Nordic and Baltic member countries. Around two-thirds of these loans were revolving loans, while the rest were term loans.
In 2021, NIB set a specific sustainability-linked lending framework, which continues to take shape every day. In this context, Senior Environmental Analyst Lena Korkea-aho emphasizes that the increased impact of sustainability-linked lending requires companies to adopt ambitious sustainability strategies and targets with a credible timeline and planned measures.
Korkea-aho says that it is important to make sure that the targets set are important to the client and that the client has an ambitious plan for these targets, which is reassuring for both the lender and the borrower. For example, the first sustainability-linked loan NIB signed with Electrolux Professional AB in October was structured for seven years and 60 million to finance the transition of Electrolux Professional's operations to become more sustainable and contribute to a low-carbon economy.
NIB and EPRO agreed on three key performance indicators (KPIs) to be achieved between the beginning of 2019 and the end of 2025. The titles of the KPIs are as follows:
- Climate target related to the reduction of carbon emissions
- Business-specific target linked to water consumption efficiency in products sold
- Reducing HFC gases in products
An important step from Turkey in this area is the syndicated loan signed by the Industrial Development Bank of Turkey (TSKB) on July 8, 2021. TSKB secured financing for a syndicated loan equivalent to USD 192 million from a total of 14 banks representing 11 different countries, thus signing its second sustainability-related syndicated loan agreement. Ece Börü, CEO of TSKB, comments on the syndicated loan and the position the bank will take in the coming period: "We will continue to use our diversified balance sheet structure with our innovative borrowing transactions to support the economy in line with sustainable and inclusive development."
TSKB expects to provide 8 billion dollars of funding for the Sustainable Development Goals by 2030. Between 2021 and 2025, TSKB states that it will prioritize keeping the share of sustainability-related loans in the portfolio above 90%.
In general, one of the most important factors affecting all these processes and decision-making mechanisms is the quality business practices of companies. Environmental, Social and Governance (ESG) factors have a significant impact on the sustainability of lending and financial investment. By incorporating sustainability criteria into the lending process, financial institutions ensure that they act in line with the sustainability expectations of their customers, business partners and other interested parties. This helps financial institutions improve their risk management while increasing long-term customer satisfaction.