Oilfield services company Schlumberger has completed a €750m three-year sustainability-linked revolving credit facility but is not planning to disclose details of the key performance indicators that set the loan’s pricing to its lenders until the end of the year.
Issuing loans that claim to have sustainability characteristics without KPI targets in place is a relatively new development in the syndicated loan market and ESG specialists are concerned that banks approving targets before seeing them set an unwelcome precedent.
“It is a sustainability-linked revolving credit facility with provisions to set annual KPI targets by the end of this year. We have a deadline to present the proposed KPI targets to the lenders in November,” a Schlumberger spokesperson said.
Delayed KPIs are particularly sensitive for high-emitting companies, which are already facing tough questions about unchallenging KPI targets on SLLs that typically focus on direct Scope 1 and 2 CO2 emissions rather than indirect Scope 3 – which make up the vast majority of their emissions.
“We need to avoid this – especially for a high-emitting company,” an ESG banker said.
ESG bankers are concerned that letting borrowers take out loans without KPIs nailed down allows companies to benefit from publicising ESG credentials without actually doing anything concrete and could weaken SLLs by reducing the pressure and motivation for companies to set demanding targets.
“Everyone can say I’ll try and be green and sustainable, but if I miss, I still have the benefit of having communicated that,” a second ESG banker said.
Delayed KPIs have been seen on a handful of SLLs so far, including French pharmaceutical company Sanofi’s €8bn refinancing in December and a €2.5bn SLL for French tyre manufacturer Michelin in October, but extending the structure to more polluting companies is a sensitive subject.
A £1.1bn revolving credit for privately-owned international property company Grosvenor in June was criticised for including the flexibility to convert to a sustainability-linked loan by adding KPIs within 12 months.
However, Grosvenor’s deal requires all lenders to approve the KPIs and will not be converted to an SLL if any lenders decline.
Schlumberger is taking this a step further as it is labelling its deal as an SLL from the outset and will not seek approval from lenders before adding its KPIs.
Lenders agreed broad KPI parameters when they signed up to the loan, but by committing to the transaction they have agreed upfront to adhere to whatever KPIs Schlumberger sets.
“We can’t write a blank cheque for a high-emitting company where banks have nothing to say in the second step,” the first ESG banker said.
In May, the world’s three loan market associations updated their sustainability-linked loan principles, which state that KPIs must be relevant, core and material and refer to science where possible, but do not say when they should be committed to or disclosed.
Schlumberger announced a commitment to achieve net zero CO2 emissions by 2050 in June based on operational emissions, customer emissions and carbon-negative actions. It is targeting a 30% reduction in Scopes 1 and 2 by 2025, and a 50% reduction in Scope 1 and 2 by 2030 along with a 30% Scope 3 reduction.
“The KPI targets will be linked to greenhouse gas emissions reductions. The KPIs are not specifically linked to the company’s manufacturing activities,” Schlumberger’s spokesperson said.
US-listed Schlumberger is the world's largest oilfield services company, with offices in Paris, Houston, London and The Hague. It had revenues of US$23.6bn in 2020.
US SLLs surging
Schlumberger’s loan is already generating significant interest from US companies that are also seeking to raise SLLs, which could lead to an even bigger post-summer acceleration as the Biden administration ramps up its environmental agenda.
US SLL volume is exploding. A record US$78.3bn was issued in the second quarter, which brings the total for this year to US$113bn, compared with only US$2bn at the same point last year, and US$4.22bn in all of 2020, according to LPC data.
Many companies are using SLLs to take their first step in sustainable finance as they require less administration and are less costly than ESG bonds.
“Revolvers are much more of a light touch,” a US loan banker said.