For companies that desire to build sustainable businesses, it is critical to move past good intentions into adopting business practices with real world consequences.
Sustainability linked loans are catching on in Asia
There has been a rapid growth in the sustainable debt market in the Asia-Pacific region. A Bloomberg report pegged the ESG issuance for 2021 at over $229 billion, a more than a five-fold increase from 2016. Within the sustainable debt market, an option that has found favour particularly over the last few years is Sustainability Linked Loans (SLLs).
Unlike green loans where the proceeds are used towards meeting a pre-defined environmental goal, SLLs ensure that the borrower embraces sustainable business practices for the duration of the loan. The loans are tied to the Sustainability Linked Loan Principles (SLLP) jointly developed by a global consortium of lending organisations including the Asia Pacific Loan Market Association, Loan Market Association, and Loan Syndications and Trading Association.
These principles impact the selection of sustainability KPIs, calibration of performance targets, loan characteristics, reporting, and verification. While introducing the updated SLLP for 2022, a note from the LSTA said, “The sustainability-linked loan product enables lenders to incentivise the sustainability performance of the borrower.” It translates into lower loan rates for borrowers so long as the KPIs and performance targets are met.
In 2021, SLLs overtook green loan issuance for the first time in APAC, per the Bloomberg report — a monumental 332% growth year-on-year, bringing in about $21 billion from 49 deals. The report further added that Singapore led the region in SLL-based loan volume for 2021, cornering 36% or $12 billion.
In addition, according to Bloomberg’s data, SLL issuance in 2022 remained strong within APAC, with close to $22 billion completed in the first five months of 2022, more than double the amount in the same period a year earlier.
RGE leading the way on SLLs
SLLs are an option actively being embraced by Singapore-based manufacturing conglomerate Royal Golden Eagle (RGE) which is involved in a wide range of businesses including sustainable natural fibres, edible oil, green packaging, and clean natural gas.
RGE has emerged as a leader in the space and announced $1.65 billion in SLLs issued in 2021 across its verticals including APRIL, its pulp and paper business and Apical, its palm business. It was among the first non-property players to issue an SLL besides being the second largest issuer of these loans in 2021 within Singapore. In 2022, it raised approximately $1.6 billion in SLLs under Apical, as well as Asia Symbol, its pulp and paper business in China, bringing RGE’s total sum of SLLs issued to-date to $3.25 billion.
Tey Wei Lin, president, RGE said, “This is just the beginning. We will be moving a significant majority of our financing towards SLLs.”
RGE is also a pioneer in carbon finance deals in China and has established several ‘firsts’ in the country. These include the first foreign-owned carbon asset custody, the first foreign-owned carbon asset pledge and the first foreign-owned Chinese Certified Emission Reduction carbon asset service trust.
The reasons driving RGE’s embrace of SLLs
SLLs have been instrumental in helping RGE achieve its targets enshrined in its Sustainability Vision 2030. Tey added, “Sustainability is at the heart of RGE’s business model. We want to take the action to the ground and apply it at scale, in order to move the needle on various environmental issues from emissions to conservation. The SLLs have aligned the objectives and actions of the whole organisation from the operational to the sustainability teams to meet the KPIs under the loans.”
While RGE’s commitment to sustainability predates its adoption of SLLs, it continues to work with the following broad goals in focus:
1. Zero tolerance to deforestation: RGE is committed to zero tolerance to deforestation and supports this through a combination of monitoring, reporting, verification, and independent audits. Its Fire Free Village Program (FFVP) — a land management tool for communities to reduce the use of fire for land clearing in Indonesia —has reduced burnt areas by over 90% since 2014. A total of more than 800,000 hectares of land have been signed under the FFVP MOU over the last seven years.
2. Conservation and restoration: At COP21 in 2015, RGE announced it would invest $100 million over 10 years to restore and conserve forests. Since the launch, RGE has hit over 80% of this target. RGE also started a collaborative project known as Riau Ecosystem Restoration (RER) in 2013, in partnership with Bidara, and Fauna and Flora International, to restore one of the last few peat forest areas in Indonesia. The RER has since seen an impressive biodiversity recovery — more than 800 species of plants and animals have been identified. Today, RER boasts a fire-free landscape, communities empowered through sustainable economic activity and employment, and a global hub for scientific research into tropical peatland landscapes and biodiversity protection.
3. Lowering emissions intensity: The goals include emissions intensity reduction across RGE’s business groups by targets of 30% to 50% by 2030, and achievement of net zero status by 2050. RGE has shifted to clean and renewable sources of energy across its businesses. Under its pulp and paper business, it runs the largest and greenest pulp mill in the world in Brazil, using biomass and is 100% fossil-fuel free. Within Indonesia, it plans to install solar panels producing more than 40 MW of energy by 2025. In its palm oil business, biogas plants convert palm oil mill effluent into fuel for electricity. Finally, in its natural gas business, its facility uses hydroelectric power, reducing its greenhouse gas emissions by more than 80%.
4. Radical traceability and transparency: Underpinning its efforts on sustainability is RGE’s strong commitment to traceability and transparency. RGE traces its products to its origins to ensure sustainable practices and its palm oil business has reached 100% traceability to mills and 99% when it comes to plantations. Transparency and accountability are maintained through annual or biannual GRI (Global Reporting Initiative)-referenced sustainability reports and online dashboards which communicate useful data and information such as concession maps, supplier lists etc.
The road ahead for RGE
Besides helping to maintain RGE’s environmental focus, SLLs also move the dial on its business metrics.
RGE’s early embrace and longstanding commitment to sustainability is yielding dividends. It has obtained SLLs at a better price and interest margins, than similar financing in earlier years, despite COVID-19 and geographical tensions.
However, the journey is far from over for RGE and sustainability will remain a key priority. Patrick Ng, group treasurer, RGE, winner of Best Treasurer at CorporateTreasurer Marquee Awards 2022 said, “Moving forward, through our green treasury initiatives, we hope to help the banking community broaden their perspectives about sustainability and look beyond traditional metrics or portfolio assessment. We are fully committed to building a low-carbon future and would like to invite more players to come onboard this ESG journey.”
As a winner in the Best Treasury and Finance Strategies category at the Corporate Treasurer Awards 2022, RGE is keen on a collaborative approach with the banking and financial community. The goals remain the same: to broaden mutual perspectives on sustainability, move past traditional metrics, and create a cleaner, greener and more circular world.
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