Supporting environmentally and socially sustainable economic growth

In a Sustainability-Linked Loan (SLL), a borrower and their bank agree on a range of material sustainability targets that align to the borrower’s sustainability strategy, such as reducing emissions, cutting back on waste, improving gender diversity in the workforce or increasing First Nations employment.

The targets are required to impact material sustainability issues for the borrower and must be ambitious and beyond business as usual. If the borrower hits the targets, they receive a modest interest rate discount on their loan. If they don’t meet the targets, they pay a higher interest rate instead.

Bespoke ambitions

Charles Davis, Managing Director Sustainable Finance and ESG at CommBank, says that while the basis point discounts may not be large, when applied to loans worth several hundred million dollars, the actual dollar figure can be significant. Many organisations, he adds, are using the savings to fund their sustainability initiatives and drive further performance improvements.

“We work very closely with clients, taking time to understand their strategy, key sustainability issues, whether their existing targets can be used and whether they are ambitious enough — or if new targets would be required to address priorities,” says Davis, who explains that every SLL is a bespoke arrangement with each client. “Then we work with them to help structure the Key Performance Indicators and Sustainable Performance Targets.”

What’s measured, matters

Davis says that the nature of an SLL necessitates significant collaboration between a client’s treasury and sustainability teams. “They’re teams that may not necessarily have day-to-day engagement with each other in terms of understanding each other's drivers and goals. But certainly, through the SLL structure, there's a lot of collaboration required, therefore broadening out the understanding of sustainability across the treasury team and how it impacts on the funding markets.”

Focusing on the targets and linking them to the material environmental, social and governance (ESG) priorities of an organisation “helps provide the focus on measuring progress and driving change”, says Davis.

“We work very closely with clients, taking time to understand their strategy, key sustainability issues, whether their existing targets can be used and whether they are ambitious enough — or if new targets would be required to address priorities.”
– Charles Davis, Head of Sustainable Finance and ESG at CommBank

Five core benefits of a Sustainability-Linked Loan

CommBank clients discuss how SLLs have helped their organisations advance their sustainability objectives, and the benefits they’ve realised post implementation of the innovative funding structures.

Using SLLs to push ESG ambitions

Property fund manager ISPT set ambitious targets when negotiating its SLLs. Its sustainability performance targets (SPTs) included reducing emissions, cutting back on water use and reducing waste, as well as ensuring uplift in modern slavery practices within material areas of its supply chain (specifically, the cleaners working across its property portfolio).

The targets are a stretch above and beyond some of the targets already set out in ISPT’s sustainability strategy, says Chief Sustainability Officer Steven Peters. “Our sustainability strategy is already ambitious so implementing SLLs was a way to push this agenda even further.”

Having the SLL targets has raised awareness about the impact of achieving or underperforming against the targets and has further raised buy-in across the business, he says. “Our business and investors have always been very engaged with our ESG strategy but linking our targets to SLLs creates further interest about our specific performance and how we are achieving our KPIs, which is really positive.”

Collaborating to achieve targets

In what was considered a first for the Australian sustainability market at the time, North Queensland Airport (NQA)’s SLL included a biodiversity target designed to protect threatened species on airport landholdings through research and habitat management in partnership with Traditional Owners. Emissions reduction and First Nations employment targets are also included in the agreement.

More than 950 hectares of land and sea habitat within or immediately adjacent to the Cairns Airport property boundary was considered in this project. About half of this area is non-operational and provides significant habitat for a wide range of native plants and animals in the region, which sits between two World Heritage Sites and has significant cultural value.

The requirement for the first year of the biodiversity target was to establish a biodiversity baseline for the area and determine priority species for conservation.

“We built on our strong partnership with Traditional Owner individuals and groups to design and complete the extensive surveys,” says NQA chief executive Richard Barker. “Close to 650 personnel hours were spent in the field, more than 40 per cent of which were undertaken by Traditional Owners. Relationships and mutual respect are important for a project like this.”

The second year of the biodiversity target involved further research and the development of habitat enhancement plans for priority species. These plans will be implemented over the next three years until 100 per cent of the available habitat is functioning at its best to support the survival of these species.

“To be able to partner with the banks and the community to implement the SLL structure to do some great stuff was a good opportunity to grab,” says Barker.

Creating an enduring financial incentive

Student accommodation developer and operator Scape is on a continuous drive to improve energy, water and waste efficiency, and to reduce greenhouse gas emissions across its 38 properties. And it’s using an SLL to help it meet its ambitious targets, including Net Zero by 2025.

Its $2.5 billion loan includes KPIs for reducing emissions and encourages enhanced coverage of Green Star Ratings across Scape’s portfolio. The next SLL will draw on the information in the initial ratings to further enhance specific performance targets, says Chris Nunn, General Manager ESG.

“Implementing the Sustainability-Linked Loan helped Scape create a real financial incentive for us to achieve those sustainability performance targets,” says Nunn. “For me as ESG manager, that really helped focus the attention of the broader business on the most important targets we'd agreed with the banks, and created an enduring three-year financial incentive for us as a business to devote resources to make sure we can achieve those targets each year and unlock the interest rate discount.”

“It really helped drive that consensus within the business that these were the appropriate targets and to align us all around our commitment to achieve them as an important financial outcome for the business.”
– Chris Nunn, General Manager ESG, Scape

Bringing sustainability and treasury teams together

In determining the SLL targets and negotiating the loan terms, Nunn worked closely with the chief financial officer and treasury manager on procurement functions to understand the cost of moving to renewable energy targets.

“It really helped drive that consensus within the business that these were the appropriate targets and to align us all around our commitment to achieve them as an important financial outcome for the business.”

At Macquarie University in north-west Sydney, there was no question that when it came time to renew its lending arrangements, the university would take out an SLL, says Ben Gray, Deputy Group CFO.

The university had previously issued a green bond and, in Gray’s view, as an institution that puts sustainability front of mind in everything it does, sustainable finance was a “no-brainer”.

That extended to ambitions for the SLL itself. The finance and ESG team working on the loan whittled the KPIs down to six, expecting the finance committee to pick three. But the committee said, “No, let’s do all six,” says Gray.

Driving transparency and boosting engagement with stakeholders

Macquarie University’s six SLL targets are: Reducing Scope 1 and 2 emissions; reducing Scope 3 emissions; rejuvenating and restoring a 3-hectare pocket turpentine/ironbark forest; gender equality; expansion of junior STEM programs for under-represented groups; and embedding First Nations awareness and the UN Sustainable Development Goals in its courses.

The final goal is one way the SLL is boosting engagement with stakeholders.

“It’s touching on students in the formative stages of their careers so they enter the workforce with a deep understanding of sustainability and Indigenous issues,” says Gray. “And of course, if you're doing that for students, doing that for staff is a given — so we do it for both.”

The KPI owners – including the sustainability team, finance team, natural sciences team, Indigenous team, human resources and the junior science academy team – get together once a quarter to check on progress. “It's really amazing when you bring those people together, what they can achieve together,” says Gray.

The university reports on its progress with the KPIs to its lenders as part of the loan contract.

But it also goes a step further than that. “We're also going to hold ourselves to account publicly,” says Gray. “We're going to publish on our website that this is what we've achieved against each of the six KPIs.”

The path forward

With the introduction of mandatory climate-related disclosures for a wide range of Australian businesses (both public and private) progressively taking effect from 1 January this year, there is a growing need for – and awareness of – corporate sustainability target setting.

This development paves the way for more organisations to harness the value of SLLs in fostering collaboration, driving board and stakeholder engagement, and enhancing sustainability performance and ambition.

At CommBank, our purpose is to create a brighter future for all and SLLs are empowering our customers to embrace the sustainable future they aspire to build. Reach out to our Sustainable Finance team to learn more.