Companies focused on energy efficiency and carbon emission reductions can now earn a financial reward in the form of lower interest rates. John Uhren, Head of Sustainable Finance, Products & Strategy for BMO Financial Group, revealed this new opportunity for borrowers in a webinar presented by 360 Energy.
BMO, one of Canada’s largest financial institutions, is offering a new product called Sustainability Linked Loans (SLL). Companies that are committed to making measurable progress in meeting their Environment Social and Governance (ESG) targets may be eligible to access this innovative financing facility.
“Sustainability Linked Loans are one example of how BMO is getting capital to companies pursuing sustainable outcomes,” Uhren said. The bank is committed to mobilizing $400 Billion in financing by 2025 to help companies make meaningful progress on solving what he called, “the problems of tomorrow”.
A Sustainability Linked Loan involves selecting either internal measures in line with their global sustainability strategy, or external benchmarks associated with their sector as a whole. They do not have to be in a “green” product sector to qualify. A qualifying borrower must have already identified the ESG issues that are material to their company and have established a baseline against which to measure progress.
Companies that have made commitments to reduce energy costs, fossil fuel consumption rates, the carbon intensity of their products or their carbon emissions will want to investigate a Sustainability Linked Loan. Interest rate reductions frequently range from 3-10 basis points on a loan, depending on the degree of improvement a borrower achieves.
By providing new avenues for access to capital, BMO is sending a strong message into the market. Companies that seriously address sustainability measures are directly tackling significant business risks. BMO wants to encourage these efforts by translating that lower business risk into lower costs of borrowing delivered via Sustainability Linked Loans.
The credit facility offered to Maple Leaf Foods is a tangible example of how the Sustainability Linked Loan product works. Maple Leaf is the world’s first (and currently only) major food company to declare itself carbon neutral. In December 2019 BMO extended a Sustainability Linked Loan credit facility of $2B that in part will help Maple Leaf Foods achieve 50% carbon intensity reductions on their sustainability metrics by 2025.
Mr. Uhren highlighted the vital role to be played by independent third parties. Independent advisors will have a role in helping borrowers verify and report their progress on achieving the targets. He highlighted 360 Energy’s experience in helping their clients develop meaningful energy plans, measure energy use and reduce emissions. “360 Energy is a great partner that BMO can engage within future with our borrowers, many of whom have the best intentions but don’t necessarily know how to report or how to have that 3rd party review,” he said.
Sustainability Linked Loans help embed ESG risk management in a company’s day to day operations. This will reduce a borrower’s overall corporate risk, improve financial stability and address factors that may make their shareholders nervous.
BMO knows that companies that perform well socially and environmentally have a reputation of being good financial performers and are likely to more easily emerge from the current economic crisis caused by Covid-19 more easily.
The Task Force on Financial Disclosures of Climate-Related Risks has called for companies to disclose climate risks to investors and other stakeholders1. BMO has translated this direction into a fascinating new market product. Rather than making climate risks another onerous obligation to meet, they have reframed it into an opportunity for their borrowers. Sustainability Linked Loans provide a tangible financial incentive to encourage risk reduction in corporate operations.
Lower operating costs. Lower risks. Lower borrowing costs. What is there to not like about Sustainability Linked Loans?