The benefit of any ESG-linked debt facility is less the financial terms of the loan and more about transparency in reporting. This was the view put forward by Kate McKeon, sustainability manager at InfraRed Capital Partners, at a Global Passport event for affiliate publication Infrastructure Investor last week.
InfraRed is a UK-based fund manager focused on infrastructure and real estate investments. The firm manages around $12 billion in assets. This year it has initiated two different types of ESG-linked loan.
“Firstly, we’ve now set up ESG-linked revolving credit facilities for three of our funds,” McKeon explained. Two of these facilities are connected with publicly traded InfraRed funds. “I think that demonstrates our commitment to start extending ESG beyond just the investment portfolio and to all aspects of our business,” said McKeon. “Those KPIs… dictate terms of that loan and mean we have to transparently disclose our performance against those ESG KPIs to our investors and – in the case of the two listed funds that have these facilities –… in the public domain.”
At the asset level, the firm completed a A$2.2 billion ($1.61 billion; €1.36 billion) refinancing for Australia’s Royal Adelaide Hospital in July. As the firm noted at the time, this was “the world’s largest sustainability loan in the healthcare sector, and the largest project finance green/sustainability loan in Australia”.
The rationale for making this a sustainability-linked loan was to drive interest in the debt. “It’s a sizeable loan and the team really pushed for it to be a sustainability-linked loan to get that demand from the banks; it’s fair to say it ended up being a huge success… over two times subscribed.”
There are “no major financial implications” of the asset missing or hitting its ESG targets, McKeon explained: “It’s really about how the asset is promoting the credentials of the business.” If the project does not remain compliant with the sustainability framework it agreed with the debt financiers, then they have to inform the banks and stop promoting the asset’s ESG credentials.
What is common to both the subscription credit facilities and the Australian loan is that they both drive “transparent disclosure in terms of how you are performing against those ESG KPIs”, said McKeon.
McKeon spoke alongside Swami Venkataraman, senior vice-president of ESG for Moody’s Investors Service, who said that sustainability-linked credit is having a more holistic impact on how GPs do business than green bonds. According to Venkataraman, green bonds require investors to deploy capital into specific projects while leaving other parts of their activities untouched.
With sustainability-linked financing, “the entire firm is committed to a certain goal and a certain way of doing business and moving in a certain direction”, he said. “And by committing the entire firm to a certain goal, what they do is they open up the rest of the capital structure of the firm as well to be of interest to ESG-themed investors.”