U.S. Sustainability-Linked Loans Are 292% More Than All of 2020

U.S. companies are increasingly converting their borrowings to sustainability-linked loans as the asset class finally takes off in the world’s biggest economy.

U.S. loans with terms tied to environmental, social and governance targets have jumped to about $52 billion in volume this year through May 21, a 292% increase compared with all of 2020, according to Bloomberg data. Such debt was already picking up last year before Covid-19 struck due to growing investor appetite for sustainable themes.

While the loans lag those in Europe, where the debt structure originated, a green policy push by President Joe Biden and greater awareness of social justice is bringing scrutiny to both bank lending and corporate exposure to ESG risks. Cisco Systems Inc., BlackRock Inc. and General Mills Inc. are among the firms tying revolving credit facilities to targets such as carbon emissions, renewable energy and workplace equality.

“The sustainability-linked revolving credit facility is being very warmly received and accepted by corporate issuers in the U.S.,” said Marilyn Ceci, global head of ESG debt capital markets at JPMorgan Chase & Co. “We see nothing but demand increasing for the product.”

U.S. Sustainability-Linked Loans Are 292% More Than All of 2020

Such debt instruments are linked to key performance indicators that include various sustainability goals or ESG ratings from companies such as Sustainalytics and EcoVadis, and have no restrictions on usage of funds. That’s in contrast to green financing, where proceeds are restricted for environmental projects or investments.

Borrowers under the sustainability-linked loan agreements will earn a discount or penalty on loan pricing based on whether their ESG-related targets are met. For example, manufacturing services firm Jabil Inc. will get up to 4 basis points cut or increased in the interest expense of its recent revolving credit facility depending on whether or not it achieves its greenhouse gas emissions, health and safety goals.

Most of the issuance is for investment-grade rated firms, typically through a company’s revolving credit facility. But 2021 has also seen the emergence of more ESG-linked leveraged loans, such as Lonza Ingredients’ loan to help finance its buyout by private-equity shops Bain Capital and Cinven.

Read more: U.S. Leveraged Loans Start to Follow Europe in ESG-Linked Deals

Among high-grade U.S. firms, ESG-linked loan sales of $41 billion so far this year are already quadruple that of 2020’s full-year issuance, while leveraged deals with ESG structures are almost triple that of last year’s annual volume.

Volumes were initially expected to pick up in 2020, but the disruption caused by the Covid-19 pandemic delayed the growth.

U.S. issuers are also beginning to mirror the sustainability-linked loan structure in the corporate bond market, albeit with fewer deals so far this year. Poultry company Pilgrim’s Pride Corp. sold $1 billion of notes in March, which could incur a 25 basis-point price increase if it fails to meet certain sustainability targets.

Some companies are embracing sustainability-linked revolving credit facilities as a first step into the ESG bond market, JPMorgan’s Ceci said.

So far, Europe accounts for more than 70% of global ESG-linked loans every year, encouraged by the European Union’s regulations for sustainable financing. But while the region’s $87 billion of such issuance this year outstrips the U.S., the latter’s fast pace of growth may help it catch up.

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