Food industry shows growing appetite for green finance
Call it a virtuous circle. As the number of companies pursuing sustainability has grown, the market for sustainability finance has grown, which in turn encourages more companies to go green. Agro-industries, under pressure in areas ranging from greenhouse gas emissions to biodiversity, increasingly want to join forces.
Sustainability Linked Lending (SLL) has proven to be an area of particular interest. Barely four years old, the market has reached $ 330 billion in new issuance so far this year, up from around $ 50 billion in 2018, according to a study released this month by Bank of America. “Sustainability-related loans have grown tremendously in recent years,” says BofA.
Under these loan agreements, companies must pay investors higher interest rates if they fail to meet agreed sustainability goals. But companies like SLL agree on the flexibility they allow over the use of products – a key reason, according to BofA, that they account for around $ 700 billion of the global $ 1.3 billion market for retailers. loans linked to environmental, social and governance (ESG) factors. .
And although “greenwashing” – whereby companies promise more about the environment than they deliver – remains a constant concern, lenders are cracking down. In May, the Loan Syndications and Trading Association (LSTA), a U.S. trade organization, tightened its SLL requirements, so borrowers must get an independent external audit of their environmental performance against targets.
As more business sectors seek to capitalize on the appetite for ESG investments, standard setters are responding with expert advice. In June, the UK-based Climate Bonds Initiative updated its standards for agribusinesses looking to issue green debt. For the first time, it added criteria relating to livestock, including animal welfare and the provenance of feed, where criticism has been leveled regarding environmental impacts.
According to Lini Wollenberg, a research professor at the University of Vermont and senior technical consultant in agriculture for the CBI, many impact investors have been reluctant to fund livestock deals because of environmental risks. In response, “the CBI has made it clear that it wants to set high standards” for corporate borrowers, she explains.
“The CBI criteria should provide sufficient assurance to investors that at least climate risks are minimized,” she adds. “Green debt offers an opportunity for finance to create incentives to guide the sector in sustainable directions. “
One of the biggest SLLs in the agriculture industry to date was a $ 2.1 billion deal signed by Chinese company Cofco International in 2019. It was the largest open-ended credit facility for a commodities trader, surpassing a $ 745 million sustainability loan for Gunvor Group, the Switzerland-based group. commodity trader, in 2018.
Sustainalytics, a ratings provider, says Cofco met its sustainability goals last year, including year-over-year improvements in the traceability of commodities, such as soybeans.
Earlier this year, Sustainalytics also verified a sustainable bond framework for Kellogg, the US food company. This framework sets standards for Kellogg when issuing green debt to finance projects that can reduce its carbon footprint and help promote sustainable supply chains.
For example, he says the proceeds from green bonds can be used to fund efforts to help farmers cope with climate change. Kellogg also says he intends to source food with certifications such as the Responsible Soy Roundtable, a Zurich-based nonprofit that promotes sustainable soybean production.
“With lending linked to sustainability, this is an area where we have seen the bar really rise with the recent round of [LSTA] principles that have been published, ”said Heather Lang, executive director of sustainable finance solutions at Sustainalytics.
Europe continues to dominate the SLL market. Mainland lenders issued about $ 150 billion in SLL in 2020, more than North America and Asia combined, according to BofA. In 2018, Danone signed one of the first operations of this type: a loan of 2 billion euros including financing costs linked to the ESG performance of the French food group.
However, as the Kellogg and Cofco agreements show, green debt is gaining ground around the world. In 2019, for example, Singaporean bank DBS signed a S $ 27 million SLL with Chew’s Agriculture, one of the city-state’s largest egg producers. Chew’s will pay lower interest rates if it meets Humane Farm Animal Care (HFAC) standards.
Likewise, in South America last year, Tereos Sugar & Energy Brazil, a large producer of sugar and ethanol in the country, announced an SLL of $ 105 million, the first of its kind for the industry. He pledged to reduce carbon emissions and water consumption in sugarcane production, as well as increase his ESG scores.
Tereos will benefit from a reduction in its interest margin for each year of achieving its sustainable development objectives, with the hiring of a second contact person to verify the results.
Brazilian green issuance has been strong this year, according to CBI, and the bond and loan pipeline is growing. “The sustainability mechanism is gaining popularity among Brazilian issuers and borrowers,” the CBI said.
As the corporate green debt market evolves beyond its major emitters into power generation, more agribusinesses are likely to adopt the products. “I anticipate that some of the trends we see more broadly in the industry will be the same for food and agriculture,” Lang said.