Sustainable Loan: Tesco’s £2.5bn sustainability-linked loan

IFR Awards 2020
3 min read
Tessa Walsh

Waste not, want not

Supermarket operator Tesco raised the bar by adding science-based targets to its £2.5bn sustainability-linked loan in October, becoming the first UK company to do so as the food retailer pushes hard on its commitment to become a net-zero emissions company by 2050.

Tesco’s use of the Paris Agreement’s 1.5-degree Celsius trajectory on global warming, rather than the more commonly used 2°C path, reflects an approach to ESG that helped to set ambitious targets on its SLL that can be tested robustly in line with ICMA’s recommendations for sustainability-linked bonds.

The move has already had a positive knock-on effect with other UK companies seeking to follow suit, as retailers and UK companies remain under-represented in sustainable finance and the UK races to improve its profile before chairing the UN’s COP26 climate change conference in Glasgow in November.

“In discussions there was no stone left unturned as to the options and how we can effectively structure the best possible transaction,” said Cecile Moitry, co-head of sustainable finance markets at BNP Paribas.

Tesco’s longstanding commitment to sustainability recognises the role that major retailers can play in decarbonising the wider economy by tackling social and environmental challenges and supply chains. The company has published its food waste data annually since 2013.

In 2017, Tesco was the first global corporate to set science-based climate change reduction targets and published its “Little Helps Plan” to outline its sustainability strategy.

The company created a set of key performance indicators in 2018, which were reassessed in early 2020 as part of a wider review of Little Helps Plan’s relevance. Linking targets to Tesco’s core financing was the next step.

“The ambitious science-based targets embedded into Tesco’s sustainability-linked loan demonstrate how sustainable finance can be an accelerator for the progressive decarbonisation of a business,” Anne Marie Verstraeten, BNPP’s UK country head, said in October.

The financing replaced Tesco’s £3bn committed facilities, including a £2.6bn revolver that was due to mature in 2021. BNP Paribas structured the loan and was sole coordinator and sustainability coordinator, highlighting the strength of the bank’s league-topping SLL franchise.

With a wealth of data already available from Little Helps Plan, Tesco created three KPIs for the SLL, which were audited and reflect issues that stakeholders see as crucial for the retail sector. The company will achieve a margin reduction on the loan if it achieves the KPIs.

The KPIs included reducing Scope 1 and 2 CO2 emissions from 2015 levels, which covers three-quarters of Tesco’s greenhouse gas emissions; and improving the percentage of renewable electricity from on-site generation or from the grid through power purchase agreements.

The third KPI was to waste no food safe for human consumption inside the UK retail operation, which plays to the emerging theme of the circular economy.

The financing was also the first syndicated loan in the UK with a margin based on risk-free rates for sterling and US dollars from day one as the market takes further steps towards Libor transition.

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