Bad, unethical companies take note. You're going to soon cough up more for debt
- Commodity companies in cocoa, coffee, soy, and even oil have jumped into sustainability linked loans.
- Companies can reduce the interest rate on their debt if they meet green criteria, and will be punished financially if they don't.
- Sustainable finance has become more and more commonplace in the commodities industry.
Companies across some of the world's murkiest industries have taken steps to save money, (and bonus: improve their less-than-squeaky clean images) by taking on "sustainability loans." A slew of commodities producers, users, and traders have joined the trend in the past 12 months across areas including the notoriously dirty palm oil industry.
Take Switzerland chocolate company Barry Callebaut, one of the world's largest cocoa producers. Last year the company, stung by an accusation of illegally purchasing cocao from protected parks in the Ivory Coast, linked one of its credit facilities (a form of loan) to sustainability rankings.
That means the interest rate on its loan can go lower if it performs well on sustainability criteria, which is determined by an independent ratings company called Sustainalytics. Callebaut's deal, previously unheard of, was the first of many. (Callebaut did not immediately reply to a request for comment on the cocoa purchases.)
"Market uptake has been high," said Leonie Schreve, head of sustainable finance at ING. "Companies are realising that this is part of their transition towards a future economy aligned with the Paris Accords."
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Research by firms such as Nielsen has suggested that millennials, in particular, are more willing to spend larger amounts of money to buy products that are sustainable. Companies are taking note, with sustainable financing now regularly mentioned by banks, investors, and major businesses.
Major palm oil producer and trader Wilmar signed up to a similar loan last year - the first of its kind in the palm oil sector - an industry that has repeatedly drawn criticism from environmental groups.
Singaporean commodity trader Olam took similar steps this year with a $500 million bank loan linked to a range of environmental, social and governance (ESG) metrics. Importantly, if the company performs well against the metrics the cost of its debt will decrease, saving money while winning brownie points from environmentalists.
Some players in the oil industry - the climate's biggest boogeyman - are even in on the act. Switzerland-based oil trader Gunvor, announced a sustainability linked bank loan, and will be punished financially if it fails to meet the targets set out in its loan agreement. It also said any savings from meeting those targets will go towards its recently launched Gunvor Foundation which works with aid groups in Africa.
"We reward companies which choose to use innovative sustainable investments," said Esther Berkelaar, head of trade and commodity finance, agriculture at Rabobank. "On the other hand, banks will increasingly require a higher interest rate from companies which are significantly falling behind on sustainability performance, because the bank runs a higher credit risk."
Another commodity trader, ECOM, also took the step of linking its financing to its social sustainability objectives in 2018.
The companies are motivated to clean up their act, but perhaps the bigger incentive in a world of cut-throat competition and thin trading margins. To be sure, it's an uphill battle. The commodities industry has struggled with reputational hits and an array of scandals ranging from modern slavery, child labor, and bribery.
"We have clear restrictions on what we don't do," said ING's Schreve, declining to elaborate. "But more importantly, we seek opportunities to support our clients in financing their sustainable transition."