ESG-Linked Loans Are Set to Blast Off in Canada, CIBC Says

Sustainability-linked loans, a type of financing subject to a borrower’s compliance with environmental or socially responsible standards, is set for a boost in Canada as the government and companies move aggressively to reduce greenhouse gas emissions.

“You’ll see support for this product in virtually every sector going forward,” said Eric Metivier, a managing director and head of corporate banking for Canada at CIBC. “This is the beginning of the story for sustainability-linked lending in Canada.”

Sustainability-linked loans are a type of financing that tie borrowing costs to how well a borrower adheres to a set of environmental or social-good metrics. CIBC’s bullish view for the loans comes at a time when the North American country is moving ahead with a related push on multiple fronts.

The Supreme Court of Canada ruled last week that Prime Minister Justin Trudeau’s national carbon tax is constitutional, cementing the country’s most ambitious environmental policy to date.

Also, Canada’s Office of the Superintendent of Financial Institutions is exploring whether climate concerns should be added into regulatory capital calculations or warrant additional supervisory procedures and reporting, according to a solicitation for feedback. Banks, for their part, are building out their own internal ratings and accounting of climate-impact issues, Metivier said.

ESG-Linked Loans Are Set to Blast Off in Canada, CIBC Says

“There are a number of steps in progress both at the regulator and inside banks at the moment,” Metivier said in a telephone interview. “I think those two streams will come together into a very strong environment for the product.”

Tax Driven

The carbon tax is seen as a potential driver for companies and industries including oil sands -- most of them based in western provinces such as Alberta -- to go ahead with large-scale abatement options such as investments in carbon capture, utilization and storage, known as CCUS. In that sense sustainability-linked loans may be a good fit.

The loans “are all about progress, they’re all about going from point A to point B,” said Metivier. “Our western Canadian clients have a large number of activities underway to reduce their carbon footprint and the carbon intensity.”

So far, a small number of companies in Canada have utilized sustainability-linked loans. Since the beginning of 2019, loan volume has added up to the equivalent of $7.2 billion, according to data compiled by Bloomberg, including a C$1 billion revolving credit line signed by Enbridge Inc. earlier this year.

Any premium advantage for the product is relatively small since it’s a developing market. The typical spread adjustment is equivalent to an increase or decrease of five basis points, according to CIBC.

“The price changes in these deals tend to be quite a bit smaller than what you would see when the credit rating changes,” said Metivier. “I do see that day coming when there will be a different capital allocation based on internal ratings around sustainability.”

©2021 Bloomberg L.P.

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