Sustainability Linked Loans: integrating sustainability into daily practice

An interview with SBM Offshore.

Nowadays, banks are issuing more and more loans that are linked to sustainability performance. All over the globe and across all sectors, we see a strong increase in these sustainability-linked-loans. SBM Offshore secured the first RCF linked to sustainability performance in the oil and gas services industry. To better understand, but also to gain insight how it helped the sustainability agenda of a company, we asked SBM Offshore to give us some more insight.

SBM Offshore was one of the first companies to receive a sustainability linked loan in the Netherlands through a revolving credit facility. What did it bring SBM Offshore? How is the loan structured? What are tips, tricks and pitfalls? These are one of the many questions we’ve asked Jordan Strik (Global Sustainability Manager at SBM Offshore) and Boudewijn van Schaik (Head of Corporate Finance at SBM Offshore). The interview was with Nick de Ruiter and Marleen Blanson Henkemans of Sustainalize.

Serving two purposes
“We always had a revolving credit facility (RCF)[1] which is refinanced every 4 years” explains Boudewijn. “We were seeking how we could optimize this loan, as it didn’t completely fit our business and the reporting requirements were not in line with our way of working. At the same time, we were getting more and more ambitious in sustainability and as such, actively started seeking possibilities to link our RCF to our sustainability performance.” This way, SBM Offshore could address two purposes: making the RCF more aligned to the business activities and imbed its sustainability activities in the company’s core financing facility.

Boudewijn van Schaik (Head of Corporate Finance at SBM Offshore).

Discussions with banks
It was ING who was the most advanced at the time in providing these types of loans. They helped structuring similar types of loans in the past and were already supporting SBM Offshore with refinancing of its RCF facility. During the structuring process, Rabobank was brought onboard as the dedicated sustainability partner. “We already had clear ideas on what a sustainability linked loan could look like,” explains Jordan. “We also have a strong track record in Health, Safety, Security and Environment [HSSE] and Sustainability, so we were able to use this experience in shaping the right structure. It is, however, important to have one of the banks as a sustainability coordinator. First of all, to challenge the sustainability elements in the loan, but also as a gatekeeper on behalf of the other banks. Both SBM Offshore and the banks wanted to make sure that this loan was not stimulating greenwashing.” The RCF banks consortium was led by ING, with Rabobank as sustainability coordinator and ABN AMRO and MUFG Bank as modelling banks.

Jordan Strik (Global Sustainability Manager at SBM Offshore).

Sustainalytics as independent rating
In the discussions regarding the set-up of the RCF, and particularly the sustainability metrics, it soon became clear that it was best to link the RCF to an independent rating. Sustainalytics was chosen since it was deemed a very robust and a well-known rating globally. “Both SBM Offshore and the banks wanted to find an objective and consistent way of measuring the improvements in sustainability,” explains Jordan. “We could have linked it to internal KPIs, but linking it to an independent rating mitigated any risk of bias.” As such, the loan is linked to the performance of SBM Offshore in the Sustainalytics rating and to what extent it is making progress on its score. Sustainalytics performs a rating every year. But does it also pose challenges for SBM Offshore? “We are continuously improving our sustainability performance framework , factoring in learnings from but also challenging methods by external ratings agencies” tells Jordan. “For instance, we use the global standards and an industry framework to measure CO2 emission per production unit, whereas some rating agencies use  CO2 emission per revenue. This method however makes less sense for the revenue model SBM Offshore has.” Moreover, SBM Offshore has aligned its sustainability performance to company remuneration. A percentage of incentive pay is linked to the achievement of sustainability targets which are based on the United Nations Sustainable Development Goals [SDG] framework. By performing on these targets, SBM Offshore ensures performance as measured by external rating agencies. Also important is to take action and learnings based on underperformance and to be open on this to stakeholders.

Serving sustainability and cost reduction
What sets this RCF apart from comparable RCF facilities is the linkage between the Company’s sustainability performance and the interest margin on the RCF. The performance on the Sustainalytics rating has an effect on the interest rate payable in the form of a bonus/malus, adding up to a five basis points discount calculated on the facility’s interest rate . On a credit facility this size, this is a sizeable amount that goes directly into the Profit & Loss of SBM Offshore, however this is not the main driver for this initiative” tells Boudewijn. “The cost reduction is a factor , but the improvement in sustainability is the key achievement here. And off course it’s always better to go back the lenders in this case and demonstrate we met targets!” SBM Offshore experienced that the sustainability linked loan also inspired colleagues elsewhere. They see that sustainability applies to all roles in the company and see that sustainability brings tangible value, both financial and non-financial. “In practice we see an intrinsic motivation to act more sustainably“ tells Boudewijn. “The sustainability linked loan indeed helps in increasing the performance, but we would have been on our way to further improve anyhow.”

An important vehicle for the oil & gas industry, key is to keep focus on material impact
Investors and lenders continuously improve on their sustainability approach in a world where they are held publicly accountable for any signs of underperformance. In that light the energy sector is placed under increased scrutiny when it comes to capital allocation. With the newly published EU Taxonomy, access to capital for companies in the oil & gas industry is not a given. “We are not in the greenest sector,” admits Boudewijn, “but the world will need oil while working towards an energy transition , and SBM Offshore is committed to meeting the needs of an evolving energy mix, with a more dominant role for gas and renewables in the future. Sustainability linked loans will help in making this transition.” Jordan adds “The sustainability performance adjustment allows for the RCF’s margin to increase or decrease depending on the Company’s environmental, social and governance (ESG) performance as measured by Sustainalytics. Companies like SBM Offshore have a leading HSSE approach and culture with. This exact skill is needed in the transition towards a more sustainable world.  We should, therefore, be wary of short-termism, hypes and greenwashing. We see a strong push from the banks to issue loans that are linked to sustainability, but the eye should always be on the ball for the underlying long term impact – in our view linked to the UN SDGs.” “Stakeholders and banks should always be critical on the actual sustainability performance,” Boudewijn points out. “A vessel that happens to be dual fuel, and can run on the ‘cleaner’ Liquidified Natural Gas (LNG), still emits CO2. Whether a ‘green bond’ should apply here can be questioned” There is still room for development in the concept of sustainability linked loans. Jordan: “One example is SBM Offshore’s eMission ZERO™, a program aiming to bring to market solutions that have near zero emissions in the operational phase. This is where the sector can make a big difference. ”

Construction in progress on a SBM Offshore Multi-Purpose Floater (MPF) in Chinese yard SWS. Photo credit Kai Hartmann, Copyright SBM Offshore.

Clear future for sustainability linked loans
There is a sharp increase in the number of sustainability linked loans and green bonds that are issued globally. There is a clear push from banks to issue more of these types of loans, as well as more and more companies seeing their sustainability efforts being translated into a lower cost of capital. Next to reputational advantages, the sustainability linked loan increases the focus on integrating sustainability in the business. “I see a clear future for sustainability linked loans, as long as we can connect it to real action and impact,” explains Jordan. “Moreover, we need to make sure that we do not solely focus on specific sustainability parameters for a loan while losing track of the others. This can have adverse effects on, for instance, reaching the Sustainable Development Goals (SDG). This is why we maintain our focus on important frameworks such as the SDGs, regardless if it is linked to a sustainability linked loan.” “I share this view” argues Boudewijn. “For example, we are increasingly working with CO2 shadow pricing in our projects and improving our sustainability performance. The sustainability linked loan should align with current efforts rather than the other way around.” “We also need to bear in mind that we are a global company,” says Jordan. “Some sustainability items are particularly high on the agenda here in Europe, but in other parts of the world, this is much less the case. We need to remember that the SDGs themselves foresee bringing the right balance there. A sustainability linked loan should be able to get stakeholders on board across the world. Overdoing it in one region might hurt others.”

Aligned to the vision of Sustainalize
The introduction of sustainability linked loans is aligned with the vision of Sustainalize on sustainability. If we want to take new and ambitious steps within companies, the whole company needs to integrate sustainability into its daily practice. Be it the risk management department who needs to help to identify the risks associated with climate change (by translating the recommendations of the Taskforce of Climate-Related Disclosures), the internal audit department that needs to help in having the right management information, or the finance department who can link sustainability performance to a lower cost of capital.

For further information on Sustainability at SBM Offshore please visit www.sbmoffshore.com where the annual report – including Sustainability Performance – can be read. Revolving credit facility – SBM Offshore Annual Report 2019

Want to know more about Green Bonds and Sustainability Linked Loans? Please reach out to Nick through nick.de.ruiter@sustainalize.com.

[1] An RCF is a mechanism by which the Company has access to a committed credit facility on relatively short notice and is able to utilize the funds for various purposes.

Authors: Nick de Ruiter & Marleen Blanson Henkemans.