Sustainability Linked Loans: a tool to highlight your ESG commitments

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Chint Kulkarni: It’s a very highly visible way of showing a link between what they’re trying to do from an ESG perspective and their financing, and so it demonstrates their commitment because to the extent they’re successful in achieving some of their goals, they’ll get a small improvement in pricing.

Dominique Barker: Today, we are joined by Chint Kulkarni, who leads the loan syndication area at CIBC, and she’s been very actively involved in sustainability linked loans. Welcome, Chint.

Chint Kulkarni: Hi, good morning.

Dominique Barker: Chint, why don’t we start with what you’re seeing in the sustainable finance markets? Maybe you can start by talking about some of the trends that you’re seeing.

Chint Kulkarni: Yeah, absolutely. It’s a pretty exciting time in the sustainable finance market, in particular in the loan market. And the reason is this market, which started out in Europe and has really been dominated by what we call activity based financings, where you raise funds and you direct those funds to certain projects or initiatives that are considered green or social. So an example of green would be a solar project, an example of social would be affordable housing. So those are called activity based products because you have to connect the dots between the funds raised and what those funds are used for. What we’ve seen advance in the last number of months is behavioural based products, and behavioural based products are really exciting because they are focussed on progress. And if you think about progress, any company has an ESG framework that is focussed on improving, moving from point A to point B, and so these behavioural based products are applicable to all sectors, irrespective of the industry, the size, the rating of the company. And there are very inclusive, in particular inclusive to sectors that might otherwise be considered hard to evade, sectors where it’s more difficult to find applicability of ESG financing.

Dominique Barker: Right. So it’s about improving. And I listen to one of the Wednesday calls. And by the way, for our audience, if they’re interested in listening to a replay where we discussed some of this in more detail, please reach out to us. But I understand there were two methods to look at this. There’s the key performance indicators or KPIs, and then there’s the ratings improvement. Do you want to just talk a little bit about that?

Chint Kulkarni: Yeah, absolutely. The two methodologies are those two that you just noted. So one is to take a ratings and these ratings are provided by third parties. Think of them as very similar to public debt ratings. And what you do is you pick a couple of those ratings, you get a rating in place, you might already have a rating, and then you measure your progress with respect to that rating. And those methodologies are inclusive of all of what you’re doing with respect to ESG, the KPI method, which is what we’ve seen more of in Canada, is more bespoke. It’s quite flexible in the way the KPI method works is you pick certain metrics from your broader ESG platform and certain targets and you measure your success against those targets. So an example in the category would be a reduction in intensity. An example in the social category might be racial and women’s representation in your workforce. For example, in the G category might be the percentage of women on your boards, and you target your success against those you measure it every year.

Dominique Barker: Right. What’s interesting there, and I think it’s important for our corporates who are listening, is that it’s tied to your corporate strategy, right?

Chint Kulkarni: That’s right. Not recreating here. You’re taking what you already have in place and you’re electing to highlight or measure your performance on certain of those categories. And you might pick two. You might pick three. In some cases, we’ve seen up to five KPIs selected.

Dominique Barker: Ok, OK, maybe. Can you talk from the Borrower perspective? You’re obviously meeting with a lot of our corporates. I know you’ve been really busy. Perhaps you can discuss what they’re saying in response to this product.

Chint Kulkarni: Yeah, some of the observations that we have from working with our clients on the sustainability of loan product in particular is what they like about it, is it’s a very highly visible way of showing a link between what they’re trying to do from a ESG perspective and their financing. And so it demonstrates their commitment because to the extent they’re successful in achieving some of their goals, they’ll get a small improvement in pricing. To the extent that they’re not successful, they’ll be more punitive pricing. And again, that metric, we call it a two way, but it does show commitment, given you have a change in pricing if you’re not successful in achieving your goals. The lenders have a really positive view of these deals as well. And it takes something that’s otherwise quite a low returning product for the banks and turns it into a more attractive piece of paper, because, of course, all of the banks also have commitments to ESG rate financing that they’re trying to meet. So our borrowers like that and I think the last thing that they really love about it, I would say is how flexible it is, because you can put this in place on a piece of debt that’s already existing in your capital structure. Or you could raise a new credit facility and put an overlay on top of that facility. So it’s really flexible.

Dominique Barker: Great. And. You mentioned the Two way and the pricing discount or perhaps penalty, but it’s not really about the pricing for the corporate, is it? Could you describe that?

Chint Kulkarni: It’s absolutely not about the cost savings. It’s about concepts that I mentioned. It shows a high level of commitment. And that commitment is something that all of your stakeholders may be interested in. And we’ve had clients tell us that they’ve received feedback from investors, from their employees, from their suppliers. So it’s a highly visible form of commitment to ESG that all of your stakeholders can do. So it’s much more about that than it’s about the pricing.

Dominique Barker: Interesting. And it’s also the way for the finance department to play their role in terms of the corporate strategy with regards to ESG. So that’s interesting. Can you talk about the possible size of the market? I see you doing a lot of meetings and I see a lot of interest, but what could it look like going forward?

Chint Kulkarni: I’ve sort of described it as the size of the sustainable finance market, could be the size of the financing market. And you could see every corporate have some component of ESG financing in their structure that could be activity based or it could be behavioural based. But we view this as a product that’s going to continue to see a tremendous amount of growth in interest.

Dominique Barker: So could we see Canada evolve to where Europe is? And I think the way I’ve heard you describe it and I’ve seen it, is that European investors are asking, why aren’t you doing sustainability linked loans rather than why don’t you consider it? Do you think we could evolve to that level in North America and Canada in particular?

Chint Kulkarni: Yeah, I can absolutely see that being the future state where everyone’s got one of these in place and it’s the expectation.

Dominique Barker: Evolution. It’s an evolution. Chint, I wanted to finish off with a question. I ask all of our guests, what are you doing personally to reduce your own carbon footprint or to reduce social inequalities? I know you do a lot.

Chint Kulkarni: Yeah, I mean, the one that I’d highlight and you’re familiar with it, Dominique, is supporting the United Way. I’ve been a supporter of the United Way personally and through some of their fundraising programmes. And I love the way they entwine themselves into the communities around them in a really constructive manner. I feel really confident the dollars that I provide and the dollars that we raise are going directly into the hands, not only of those who need the programmes and the funds that they provide, but into the community organisations that are best equipped with boots on the ground to make a real impact in terms of the community that we live in.

Dominique Barker: Well, I’ll second, that and actually maybe just to underline the areas, for example, in the greater Toronto area that were most hit by covid also happened to be the areas that have the lowest incomes and are the most racialised areas of the GTA. So thank you very much for your leadership, not only in our community. Thank you very much for that. But thank you also for your leadership within CIBC in regards to the sustainability linked loans and loan syndication. Thanks for joining us today, Chint.

Chint Kulkarni: Dominique, thank you for having me.

Dominique Barker: Please join us next time as we tackle some of sustainability’s biggest questions, providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is the sustainability agenda.

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