Sustainable finance is taking root in Asia’s bank loan market as lenders step up their focus on environmental and social investments and industry associations introduce additional protocols to standardise market practices.
The Asia Pacific Loan Market Association and two global bodies launched a new framework in March tied to borrowers’ sustainability performance, following up on the introduction of green loan standards last year.
The Sustainability Linked Loan Principles (SLLPs) were developed in conjunction with financial institutions that are active in issuing loans where interest margins are tied to certain sustainability targets.
“Unlike Green loans, SLLPs don’t require the loan proceeds to finance Green projects. However, SLLPs encourage borrowers to become holistically ‘greener’ by measuring and reporting sustainability linked targets on an ongoing basis,” said Andrew Ashman, head of loan syndicate for Asia Pacific at Barclays. “These loans will usually offer a reduction in margin if certain pre-defined sustainability targets are met.”
Singapore-headquartered agribusiness Olam International has been an early adopter, completing Asia’s first sustainability-linked loan in March 2018 and following up with an innovative US$350m three-year “Digital loan” a year later, a global first that links pricing to the borrower’s progress on a digital maturity score, to be monitored by Boston Consulting.
Both deals are forms of positive incentive loans, which reward borrowers that achieve pre-arranged targets.
Frasers Property, another Singapore-based company, sealed its third Green loan in April, raising A$600m (US$429m) from a five-year facility that is also its first Green loan in Australian dollars.
Frasers closed Singapore’s first Green loan in September 2018, a S$1.2bn (US$880m) five-year deal that was also the first syndicated secured Green loan from South-East Asia since the Green Loan Principles were established in March 2018.
Asian borrowers ranging from airports to railroads and commodity trading firms to real estate companies have tapped the Green loan market.
“Green loans will be a big theme in 2019,” said Ashman. “There is significant interest from both borrowers and lenders for the product.”
Barclays was the sole Green coordinator on Frasers Property’s A$600m Green loan, which attracted 12 banks in general syndication, including Chinese and Taiwanese lenders.
There is currently no regulatory requirement to lend to Green financings and no incremental pool of liquidity among lenders earmarked for Green loans, in contrast to the investor base for Green bonds. As more banks set their own sustainability targets, however, demand is expected to increase.
“The development of this market could accelerate if lenders were offered capital relief or funding cost benefits on their Green Lending activities,” said Ashman.