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Sustainable Finance: In Practice and in Context

October 15, 2020

Interview with Benoît David-Bellouard, Global Head of Treasury and Corporate Finance

In 2019, LDC linked a significant portion of its new financing with environmental performance, by means of sustainability-linked pricing mechanisms built into several regional syndicated Revolving Credit Facilities (RCFs).

How does this mechanism work? How else is green finance helping to drive positive change?

We spoke with Benoît David-Bellouard, our Global Head of Treasury and Corporate Finance, to find out.

Tell us more about this sustainability-linked interest rate incentive – how does it fit in with LDC’s wider sustainability commitments, and how does it work in practical terms?

For agribusinesses like ours, that work across food and feed chains to bridge supply and demand gaps, it’s important to fulfill our key role to help sustain the world’s growing population with minimal impact on the environment. That’s why in 2018 we set ambitious targets to reduce our environmental footprint by 5% over a five-year period, measuring this in relation to four key performance indicators (KPIs): CO2 emissions, electricity consumption, water usage and solid waste sent to landfill. 

The interest rate incentive that is now part of the company’s RCFs creates a direct connection between our performance against these targets and the cost of funding our operations, such that the better we perform toward our environmental goals, the lower the cost of financing.

It is important to note that the incentive feature is balanced in terms of impact, with either interest rate reductions when the company’s performance achieves its KPI reduction targets or interest rate increases should LDC underperform.

This gives us – and other companies who adopt this kind of financing mechanism – an even greater incentive to succeed in our environmental impacts reduction efforts.

In 2019, LDC exceeded its year-on-year reduction goals across all four environmental KPIs. Do you see a similar trend in the industry?

Firstly, it’s important to clarify that our asset profile and operational sector are different to other agribusiness leaders. Each company will set reduction goals based on what is reasonable and achievable in relation to its operational footprint, so direct comparisons are not necessarily relevant.

This being said, it can certainly be said that the industry at large is responding to increasing scrutiny and expectations in relation to corporate responsibility for environmental preservation, including from the financial community, which expects that the companies they fund demonstrate efforts in this sense. So it’s not a surprise that sustainability-linked financing mechanisms have been adopted by major agribusiness players since 2018.

How is performance against environmental performance indicators measured? Is there an external verification/audit, and how are results communicated to financial institutions?

Performance is measured annually for each of the four KPIs, with each metric assessed against the company’s 2018 baseline level. Annual results are aggregated across LDC’s top 25 assets, which represent more than 80% of the global emissions footprint for the company, and these figures are verified and certified by an external audit firm.

Our very positive performance overall in 2019, compared to the previous year, relates to a number of factors, including facility run rates and throughput, quality of raw materials and a greater proportion of more modern logistic assets, which by definition have a smaller environmental impact. In addition, we leveraged a one-off opportunity to dramatically improve the amount of solid waste sent to landfill at one of our facilities.

Each year, LDC provides a certification letter to its banks, which includes detailed KPI performance by asset, as well as the audit certificate. Interest rate adjustments are then set according to a pricing grid included in the RCFs, and the new rate applies until the next annual assessment.

A recent Forbes article stated that “there is strong evidence to suggest that companies who pursue a strategy of ‘doing well by doing good’ are better prepared to deal with adverse conditions and represent a lower investment risk.” What are your thoughts on this statement?

I am convinced that a company that does not demonstrate efforts to reduce its environmental impact will have increasing difficulties accessing financial markets within the next five years. In this respect, it is becoming increasingly vital for corporations to not only adopt sustainability policies and implement corresponding business practices, but also to link financing to sustainability goals.

This is all the more reason for LDC to stay firmly on the side of ‘green’ companies that can demonstrate in a tangible way their environmental commitments, and a willingness to be accountable and transparent.

Leading global companies have the maturity to understand that running sustainable operations and protecting sources of funding are necessarily interdependent with environmental stakes and the preservation of the planet’s resources. And also, therefore, a duty to take the lead in this area.

Will LDC set new goals to further improve performance, after 2022? Are there any plans to further connect financing with sustainable business practices?

Yes. Our short-term goal is to apply sustainability-linked pricing across all our regional syndicated RCFs, as and when they are renewed, which will take another two years.

After that, while challenging ourselves to do more and better in terms of environmental performance, we will also look to add more KPIs to the list of measures against which we are evaluated, broadening the scope to other sustainability performance indicators – for instance governance processes, social and community impacts, etc. 

Green bond issuance has risen rapidly in recent years, climbing to US$262bn worldwide in 2019, according to data from S&P Global. If green bonds allow issuers to raise capital and invest in projects with environmental benefits, would that also apply to LDC and why/why not?

Initially, green bonds allow the issuer to invest the proceeds of the bond into larger environmental projects – for instance a project to fully refurbish a processing asset to make it less polluting.

LDC is not yet in a position to submit such a large project, but we are keenly monitoring the green bond market, to evaluate the right time to seize such opportunities.

The green bond market is now evolving toward the loan market; we now see bond issuances linking ESG (environmental, social and corporate governance) KPIs with the bond interest rate.

We see our sustainability-linked RCFs as a first step toward integrating a greater set of green financing tools, with broader KPIs that go beyond environmental impacts, to embrace other areas that we consider equally central to sustainable business.

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