More CFOs Add Sustainability Targets to Corporate Loans

The number of companies that have sustainability targets on their corporate loans has increased by 40% in the last year.

The cfo sustainability is a term that is used in business to describe how much money a company has set aside for the future. More CFOs are adding targets to their corporate loans.

As a result of investor and regulatory pressure to become green, a growing number of businesses are linking the interest rates on their corporate loans to environmental and other sustainability goals.

Interest rates on sustainability-linked loans change depending on whether a business achieves a specified environmental, social, or governance objective, such as lowering carbon emissions. According to Dealogic, a data source, US businesses took out $83.8 billion in such loans through September 16, up from $2.5 billion in the same time in 2020. As of September 16, the total amount of corporate loans in the United States, including sustainability-linked loans, was $1.7 trillion, according to Dealogic.

The loans, which include common financial instruments like revolving credit facilities and term loans, enable finance executives to decrease interest expenses while also demonstrating their commitment to sustainability to investors, consumers, and workers.

Executives said the objectives, which are typically based on internal ESG goals or external sustainability ratings, are meant to be financially significant while still being attainable. Unlike green bonds, which generate money for particular projects, companies have more freedom in how they utilize the loans, which usually have maturities of many years.

In recent years, corporate funding linked to environmental obligations has increased dramatically. In addition to sustainability-linked loans, revenues from ESG-labeled corporate bonds issued in the United States have risen to $162.9 billion so far in 2021, up from $100.5 billion in 2020 and $44.3 billion in 2019.

These bonds and loans are becoming more popular due to a lack of global sustainability requirements. Investor pressure is causing securities authorities in the United States to explore making climate-related reporting obligatory, as businesses are under pressure to show the measures they are doing to preserve the environment.

Philip Morris International Inc., the cigarette giant, is in talks with banks about taking out its first sustainability-linked loan, according to Chief Financial Officer Emmanuel Babeau. He claimed the loan will take the place of a revolving credit facility and that it might be disclosed this month. The business refused to comment on the loan’s amount or price.

In August, Philip Morris announced a financing framework with two goals for its sustainability-linked loan: generating more than half of its full-year net revenue from so-called smoke-free products by 2025, such as its IQOS products that heat tobacco without burning it, and claiming that these products are less harmful to smokers than traditional cigarettes. For the calendar year 2020, the figure was 23.8 percent. By the end of 2025, the firm intends to offer such goods in 100 markets, up from 64 as of December 31.

Philip Morris reported net sales of $7.59 billion for the quarter ending June 30, up 14% from the previous year. The company’s net income increased by approximately 12% to $2.17 billion.

More-CFOs-Add-Sustainability-Targets-to-Corporate-Loans

Aligned Data Centers’ CFO, Anubhav Raj.

Aligned Data Centers LLC photo

“We placed our goal to become a smoke-free business at the heart of everything we do, including how we fund the company,” Mr. Babeau said.

Depending on whether a business achieves or misses its goals, interest rates on sustainability-linked loans may fluctuate by a fraction of a percentage point. Companies use third-party companies to evaluate their progress toward their self-defined criteria on a yearly basis.

Given that businesses are not required to publish this information, it is unknown how many have paid a higher interest rate for missing their goals so far, according to finance and sustainability experts.

One of many large banks that offers sustainability-linked loans is Wells Fargo. David Marks, president of Wells Fargo & Co.’s commercial capital division, stated, “We’re reacting to our evaluation of our customers’ strategic objectives and delivering finance that supports those priorities.”

Last month, Wells Fargo secured a five-year, $1 billion asset-backed loan for cable maker Southwire Co. with the help of other banks. The Carrollton, Ga.-based business, which is privately owned, refused to provide pricing specifics, but said the interest rate is linked to its goals to eradicate Scope 1 and Scope 2 emissions from its operations and energy purchases by 2025.

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According to a spokesperson for Wells Fargo, a part of the Southwire loan will contribute toward the bank’s objective of deploying $500 billion in sustainable financing by 2030.

It’s impossible to tell if the loans inspire businesses to set ambitious goals or reward them for something they would have done anyway, according to Krista Tukiainen, the Climate Bonds Initiative’s director of research.

“What we risk is that you establish goals for yourself that you know are foolproof,” Ms. Tukiainen added.

The amount of Aligned Data Centers LLC’s sustainability-linked credit facility was raised to $1.25 billion in July, up from the $1 billion it closed on last September. According to Chief Financial Officer Anubhav Raj, the company’s objectives include expanding the use of renewable energy in its data centers, performing regular ESG audits, and guaranteeing worker safety on building sites.

Mr. Raj said that the business chose to take up a sustainability-linked loan because it made financial sense. He wouldn’t say how much it would cost. The loan also helps Aligned in demonstrating its ESG commitments to its clients, who include major technology firms.

“We believe that is appealing to them and will help us gain more business,” he said.

Kristin Broughton can be reached at Kristin.Broughton@wsj.com.

More companies are adding sustainability targets to corporate loans. The sustainability rankings are a way for investors to see if the company they are investing in is environmentally friendly.