Standard Bank aims to disburse between R40bn and R50bn in sustainable financing to clients in 2022, as listed corporates in particular increasingly embrace the concept of incorporating the achievement of environmental, social and governance (ESG) targets into their loan agreements.
That 2022 target forms part of Standard Bank’s broader ambition to mobilise a cumulative R250bn to R300bn in sustainable financing to its clients by the end of 2026, which it announced in mid-March when it unveiled its new climate policy. That R250bn to R300bn target also includes R50bn in financing that is specifically earmarked for renewable energy projects.
Anneke Lund, an investment banking executive on Standard Bank’s sustainable finance team, says the lender’s blue-chip corporate and listed client base is also becoming far more receptive to embracing the concept of incorporating measurable ESG targets into their loan agreements. Nevertheless, she acknowledges that there is still much work to be done to convince smaller, privately held clients to embrace the concept of financing linked to sustainability efforts.
“Sustainable finance is becoming the mainstream way of funding and clients increasingly understand that if they don’t embrace it they are going to be left behind,” she says. “Conversations have changed quite a bit from 12-18 months ago when the response was often a case of ‘thank you but no thank you’. More recently a switch has flipped and those same clients are now very serious about it — many have even linked their executive team’s remuneration to the achievement of ESG targets.”
With banks and asset managers coming under increasing pressure to limit funding for carbon-intensive projects such as coal mines and oil pipelines, Lund says such is the speed with which stakeholders ranging from staff to shareholders are embracing sustainability that the concept must be incorporated into business strategies to avoid negative publicity. With international pressure building on SA — which is among the biggest carbon emitters worldwide — to transition its power system away from coal, she says the need for sustainable financing solutions in the country is likely to increase significantly in coming years.
“Everyone is starting to realise that it’s not a choice,” she says. “It’s actually the way you have to do business.”
While Standard Bank has established its own sustainable bond framework, first unveiled in February 2020, which allows it to raise capital for the specific purposes of disbursing funds raised to ESG-linked projects, it is also working with clients to develop their own frameworks for issuing debt or taking out credit facilities linked to the achievement of ESG targets.
Lund says the sustainable finance solutions provided to clients typically involve two types of instruments: use of proceeds products and performance-based facilities. The former is typically suited to larger entities such as state-owned companies, municipalities or big corporates with significant capital allocations specifically linked to sustainability.
A good example of the type of project that might opt for a use of proceeds loan might be a company looking to build its own renewable energy generating facility in line with the government’s 100MW allowance for embedded power generation. In such a scenario the facility would take the form of a green loan.
However, Lund says most of the demand that Standard Bank is seeing for sustainable finance solutions are for so-called performance-based instruments. These debt facilities are more suited to clients that don’t have large capital allocations for green, social or other sustainability-linked projects but who still have long-term ESG ambitions.
Performance-based debt facilities can also be used to fund any corporate expenditure ranging from working capital to capital investment but the loan agreement must set out specific ESG targets such as measurable social goals or the reduction of carbon emissions, waste or water usage.
“As and when they either achieve or don’t achieve those targets there is a price adjustment that kicks in through an adjustment in the interest rates,” says Lund. “In the spirit of sustainability we don’t want companies to go backwards in terms of ESG so there are financial repercussions or penalties for non-achievement of targets.”
While she says clients can sometimes express concern about the margin of penalty that will kick in if they don’t achieve ESG targets set out in their loan agreements, she says there is still strong demand for performance-based lending facilities, particularly for listed entities that have the administrative capacity to ensure compliance. Although SA is making rapid progress in embracing sustainable finance in this upper tier, blue chip space she says much work still needs to be done to convince smaller corporates to embrace ESG-linked financing requirements.
“The listed corporates are very ready to raise their funding going forward on a sustainable basis but the mid-tier nonlisted entities are largely still in the very early stage of their ESG journeys,” she said.
“Most of them are not quite ready to do this just yet — there’s still a long road to walk with mid-tier and smaller clients in the unlisted space.”
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