U.S. companies are increasingly converting their loans into sustainability-linked loans as the asset class finally gathers in the world’s largest economy.
According to Bloomberg data, US loans with terms tied to environmental, social, and governance goals have grown to around $ 52 billion by May 21. This represents an increase of 292% from 2020. This debt had already increased last year before Covid-19 hit due to the growing appetite of investors for sustainable topics.
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While credit is lagging behind that in Europe, where the debt structure originated, it is green President Joe Biden’s political push and heightened awareness of social justice are leading to a review of both bank lending and the risk of ESG risk to businesses. Cisco Systems Inc., BlackRock Inc. and General Mills Inc. is among the companies that tie revolving credit facilities to goals such as carbon emissions, renewable energy and equality in the workplace.
“The sustainability-related revolving credit facility has been very well received and accepted by corporate issuers in the US,” said Marilyn Ceci, global head of ESG debt markets at JPMorgan Chase & Co. “We’re just seeing increasing demand for the product.”
Such Debt securities are linked to key performance indicators that include various sustainability goals or ESG ratings from companies such as Sustainalytics and EcoVadis and are not subject to any restrictions on the use of funds. This is in contrast to green finance, which limits the income for environmental projects or investments.
Borrowers under the sustainability-linked loan agreements receive a discount or a penalty on loan prices depending on whether their ESG goals are met. For example, production service providers Jabil Inc. is getting up to 4 basis points have recently reduced or increased the interest expense revolving credit facility depending on whether or not the greenhouse gas emissions, health and safety targets are met.
Most of the issuance is made to investment grade companies, typically through a company’s revolving credit facility. In 2021, however, more ESG-linked leveraged loans were created, such as B. Lonza Ingredients’ Loan to finance the buyout from private equity firms Bain Capital and Cinven.
Read more: US leveraged loans follow Europe in ESG-linked deals
Among high-profile US companies, ESG-linked loan sales of USD 41 billion this year are already quadrupling the total annual issuance of 2020, while leveraged deals with ESG structures are almost three times the volume of the previous year.
The volume was originally expected Pick up in 2020, but the A disruption caused by the Covid-19 pandemic delayed growth.
US issuers are also starting to mirror the sustainability-linked credit structure in the company Bond market, albeit with fewer deals so far this year. Poultry factory Pilgrim’s Pride Corp. sold $ 1 billion noted in March that prices could rise by 25 basis points if certain sustainability targets are not met.
Some companies are using sustainability-linked revolving credit facilities as a first step into the ESG bond market, said JPMorgan’s Ceci.
So far, Europe accounts for more than 70% of the world’s ESG-linked lending each year, which is funded by the European Union Sustainable Funding Rules. But while the region’s $ 87 billion this year surpasses the US, the region’s rapid pace of growth may help it catch up.