Scaling Sustainability Linked Loans/ Bonds in India
Sustainability-linked loans/ Sustainability-linked bonds are quite a powerful financial instrument that i)do not limit the end use of proceeds and ii) award/ penalise borrowers depending on whether they achieve their pre-determined sustainability performance targets (STPs).
We explored these instruments through an insightful dialogue with a leading corporate and a global bank. This discussion underscored the opportunities and challenges in using SLLs/SLBs to align financial strategies with sustainability goals.
Here are 6 key answers that I learnt:
1. Are there any financial benefits for borrowers? While achieving SPTs can theoretically offer financial benefits, such as lower interest rates, these gains are often limited. Compliance costs, including external reviews and impact measurement, add a financial burden. However, SLLs/SLBs provide access to larger capital pools due to oversubscription driven by ESG-focused investors. High demand for these instruments often enables corporates to negotiate better loan terms.
2. What do banks need to look for in a corporate before embarking on a SLL/ SLB discussion? To effectively utilize SLLs/ SLBs, corporates must i)demonstrate a clear commitment to sustainability and a willingness to measure and report progress ii) embrace independent third-party verification of their targets and iii) integrate sustainability into their corporate strategy to establish credibility with lenders and investors.
3. How can banks brace themselves to offer this instrument? Banks would deeply benefit from developing in-house climate expertise, leveraging the knowledge of specialists who understand new emerging low-carbon technologies to design ambitious yet achievable targets for borrowers. A pragmatic approach is essential—balancing ambition with flexibility to avoid stalling adoption while maintaining credibility and mitigating greenwashing risks.
4. What do corporates prefer - SLL or SLB? Preferences vary by context, but corporates often favour SLBs as these are typically structured to allow review of the key target over a longer time period i.e. 3-5 years, offering flexibility to the corporate. An SLL is typically structured with annual STPs, which can be more challenging, especially for companies new to sustainability-linked financing.
领英推荐
5. Are SLLs/ SLBs only an instrument for large banks? No. These instruments can be integrated into traditional financing structures, such as term loans and credit facilities, making them accessible for banks of all sizes, including small finance institutions. Their adaptability allows broader participation in sustainability-linked financing.
6. How can we scale SLBs/ SLLs? Scaling SLLs and SLBs requires tackling high compliance costs and regulatory ambiguity. Compliance expenses, such as external reviews, often deter adoption by outweighing financial benefits. Initiatives like the Monetary Authority of Singapore’s subsidies for external verification costs demonstrate how this barrier can be reduced. Additionally, clear RBI guidance on interest rate adjustments, especially for INR loans, would boost confidence among banks and corporates. Resolving these challenges is key to driving wider adoption of these instruments.
SLLs/ SLBs present a transformative opportunity to align financing with sustainability objectives. Addressing barriers, clarifying regulations, and fostering readiness among corporates and banks will be critical to realising their full potential and driving significant impact.
Sources
Independent Financial Services Professional
2 个月Interesting