World-saving sustainability-linked loans finally gain ground in Asia

A region that’s lagged behind the rest of the world when it comes to socially-responsible financing is beginning to catch up.

Companies in the Asia-Pacific area are riding a global groundswell in demand for environmental, social and governance (ESG) loans and other feel-good investments, with Sydney Airport last month securing the largest syndicated ESG financing in the region.

“There is growing acceptance by lenders that companies’ ESG performance translates into better share performance and ultimately better credit risk,” said Chris Ruffa, managing director for energy and infrastructure at BNP Paribas SA, one of the bookrunners on the A$1.4 billion ($972 million) Sydney Airport deal.

Borrowers are becoming more open to getting measured on their ESG objectives, and banks more prepared to encourage them to expand such goals by providing financial incentives, Sydney-based Ruffa said in an interview.

To date, the Asia-Pacific area has trailed other major geographical regions when it comes to ESG loans. The most recent figures from Bloomberg NEF show that in APAC, only $605 million of sustainable loans have been signed in 2019, compared with $4.9 billion in the Americas, and $15.8 billion in EMEA.

Global issuance of loans linked to ESG criteria grew more than seven-fold last year to $37 billion, according to Bloomberg NEF data. Of that, only $850 million was from APAC.

Borrowers are attracted by the potential lower costs and the possibility of using the funds for a broader range of objectives, unlike green loans where the proceeds are earmarked for environmental projects or assets.

More than 10 lenders committed to the financing for Sydney Airport, which operates Australia’s busiest airport. Its sustainability rating was raised to ‘outperformer’ in 2018 by third-party Sustainalytics, putting it in the top 20% of global companies analyzed within the transport infrastructure sector.

To be sure, interest costs on these types of facilities may not only go down, but can also increase depending on the company’s ESG performance, as scored by an independent assessor.

Another borrower weighing a syndicated ESG loan in Asia is commodity trader Louis Dreyfus Co. Last week, it closed a $750 million deal in the US, which is tied to carbon emissions, electricity consumption, water usage and waste reduction targets.

“Sustainability-linked loans have applications across multiple sectors and the growth outlook is very positive for the product,” said BNP’s Ruffa. “The absence of use of proceeds restrictions means there’s arguably greater scope for more accelerated growth than green loans.”