A new form of green funding – sustainability linked loans (SLL) – appears to be taking off in Australasia thanks, ironically, to those otherwise carbon villains, the airport operators.
What sets SLLs apart from green bonds is that the proceeds can be used for general corporate purposes; they don’t have to be spent on environmental projects.
Although the exact terms of each SLL vary according to just how committed to reducing carbon emissions borrowers want to be, the pricing can be tied to improved sustainability performance.
So while air travel might not the most obvious poster child for sustainable finance, in Australia and New Zealand it is helping to shape the development of products that aim to improve behaviour and could yet do their bit to help in the battle against climate change.
Adelaide Airport (AAL) announced the first SLL in December last year, a seven-year A$50 million ($33.9 million) loan structured as a revolving credit facility. The sustainability performance component of the loan was based on a series of independent risk ratings produced by Sustainalytics that assess a company’s vulnerability to climate change and society’s response to it.
Sydney Airport upped the ante in May this year with a A$1.4 billion SLL.
Group treasurer Michael Momdjian told FinanceAsia that Sydney Airports had been looking for an alternative to green bonds because they didn’t have the critical mass of green projects to meet the use-of-proceeds requirements in the quantum of $100 million to $300 million.
“We had a few solar panels and some electric buses, so it wasn’t really practical for us,” Momdjian said.
In contrast, “the sustainability-linked loan was great because we still had a mechanism in which we could incentivise further improvements in our sustainability performance,” he said.
In July this year, Queensland Airports (QAL) raised a A$100 million debt facility from Westpac and Commonwealth Bank directly linked to a reduction in carbon emissions footprint at its Gold Coast Airport.
David Jenkins, head of sustainable finance at National Australia Bank (NAB), told FinanceAsia that the SLL concept is still getting across to the market. “The transactions that have come to light so far have been quite tightly managed, with not a lot of transparency. The borrowers are keeping a tight rein around the metrics.”
While Adelaide and Sydney’s airports have signed up to SLLs that are tied to energy-efficiency schemes, the Gold Coast Airport deal is the only one of the three directly tied to carbon emission reductions.
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QAL will achieve discounted interest rates on the loan if it meets its goal to reduce carbon emissions by 15% over the next three years, and before a planned new terminal opens in 2021. It will be penalised with higher interest rates if it doesn’t meet its target.
The Sydney Airport SLL has margin discounts and penalties built in too.
Ease of execution and not having to incur a financial penalty, however, were key objectives for Adelaide Airport. For this reason, its loan doesn’t carry a penalty for failing to meet the sustainability benchmark. Instead, it must report that it no longer matches sustainable standards if they reach a certain threshold.
Explaining Sydney Airport’s particular approach, Momdjian said it wanted to be sure of being able to identify certain initiatives that could be tied to a potential premium target.
“We set the targets such that we hit them over a period of time and we have scope to renegotiate those every three to five years, once those facilities mature and need to be refinanced,” he said.
The more specific emissions-related terms of the QAL loan are based on carbon accreditation through the Airports Council International programme and a reduction in carbon emissions. This programme is the only global standard for carbon management at airports and is composed of four progressively ambitious levels of accreditation.
The 275 accredited airports worldwide under the Airports Council International programme reported a combined reduction in carbon dioxide emissions under their control, of about 347,000 tonnes, in 2018.
QAL’s chief financial officer Amelia Evans said that measures being introduced to reduce greenhouse gas emissions include replacing all lighting with LEDs, upgrading air-conditioning units and replacing energy-efficient drive motors within the baggage handling system.
Adelaide Airport’s sustainability manager Leigh Gapp told FinanceAsia that their current focus was on reducing carbon emissions, understanding and adapting to the effects of climate change and addressing the waste challenge inherent with large multi-user infrastructure assets such as terminal buildings.
“Emissions-saving potential is now being ranked across the terminal, allowing maintenance activity to be prioritised and directed based on maximum emissions reduction,” he said.
The sustainability initiatives include the implementation of a smart building analytics initiative, the use of airside irrigation and cool pavement trials, as well as terminal lease agreements that require tenants to transition to compostable food service ware and to recycle, Gapp said.
AAL has also installed a rooftop solar panel system and invested in a stormwater runoff trial with South Australia Water to improve airside greenery, leading, they claim, to lower temperatures and reduced fuel burn.
The latest Australian firm to arrange an SLL is energy company AGL. It has taken a similar approach to QAL in benchmarking to peers with sustainability indices and ratings, while adding two other performance indicators – one relating to emissions intensity and the other to renewable energy and storage capacity.
The SLL structure can be applied to any borrower motivated to link its cost of capital to its sustainability performance. NAB’s Jenkins suggests that some corporates in Australia will find the SLL market challenging. “It doesn’t work for everyone. It needs to be a considered, material and ambitious approach, because if it’s not, it could well come back to bite them.”
