Why SLLs Have Only Just Begun to Roar

When Enbridge Inc. launched its inaugural C$1bn Sustainability Linked Loan (SLL) in February 2021, it marked a milestone not only for the company, but also for SLLs as flexible, sector-agnostic lending instruments that allow companies to move the needle in the fight against climate change and meaningful social issues.

Barely a year later, the product has performed beyond all expectations, and few could have imagined how quickly and how broadly appetite would grow for SLLs, which incentivize companies to achieve wide-ranging sustainability goals with financial terms that reward meaningful, predetermined sustainability objectives.

SLLs have taken North America and the world by storm, with over $370bn announced in 2021, comprising 30 percent of sustainable debt issued globally, and that pace is set to accelerate as the transition to a lower-carbon world gains momentum.

These days, SLLs are drawing the attention of not just traditionally green companies and industries, but also those that are historically less green and have ESG-related goals that align with a more sustainable future.

Enbridge is a case in point: barely three months after dipping its toes in the sustainability-linked loan market, the multinational Canadian pipeline company doubled down with a US$1.5 bn Sustainability Linked Bond (SLB) and announced a comprehensive SLB Framework.

Flexible, Industry Agnostic

Appetite for SLLs is growing in lockstep with the realization by companies across sectors that if they invest time and resources into developing a robust sustainability strategy, SLLs can align their borrowing costs directly with those sustainability improvements and sustainability goals.

Today, the financing instrument is a part of nearly every corporate credit/loan conversation with our clients, many of whom have led SLL industry-firsts in North America and the world, beginning with Maple Leaf Foods Inc., which made sustainability history in December 2019 by inking Canada’s first ever SLL.

In the past two months, many more clients have joined those ranks, including Saputo and Sandstorm, which recently became the first North American dairy company and the first North American mining royalty company respectively to enter into SLLs, and TC Transcontinental in September, the first packaging company SLL in the sector. The Sandstorm SLL was quickly followed by another in the space, when Teck Resources Ltd., Canada’s largest diversified mining company, became among the first North American mining producers to have a sustainability linked loan structured with customized key performance indicators related to climate action, gender diversity and inclusion, and health and safety.

A Leader in the burgeoning SLL Landscape

In December 2019, BMO Financial Group and Maple Leaf Foods Inc. made sustainability history, inking the first sustainability-linked loan (SLL) in Canada.

More than two years later, BMO continues to drive firsts for the instrument, helping clients in Canada, North America and further afield to drive positive change in achieving a wide range of sustainable development goals.

Today, the financing instrument is a part of every corporate credit/loan conversation with our clients, driving an ever-widening profile of industry firsts as the industry matures.

North American Mining

In October 2021, BMO acted as sole sustainability structuring agent for Sandstorm Gold Ltd., making it the first precious metals royalty company and one of the first metals and mining companies in North America to have a Sustainability Linked Loan structured with internal and customized key performance indicators.

The Sandstorm SLL was quickly followed by another in the mining space, when Teck Resources Ltd., Canada’s largest diversified mining company, became among the first North American mining producers to have a sustainability-linked loan structured with customized Key Performance Indicators related to Climate Action, Gender Diversity and Inclusion, and Health and Safety.

Canadian Packaging

In September 2021, TC Transcontinental became the first Packaging Company in Canada to issue an SLL.

North American Dairy

In August 2021, BMO Capital Markets acted as Co-Sustainability Structuring Agent for Saputo, the first North American Dairy company to enter into a Sustainability Linked Loan, and the second SLL in the food and beverage industry in Canada. The Loan amended a USD$1 bn revolving credit facility and was structured to introduce an annual pricing adjustment based on the achievement of key climate and water targets in line with Saputo’s 2025 environmental commitments.

North American Energy

In April 2021, BMO Capital Markets acted as co-sustainability structuring lead on an SLL with Gibson Energy Inc., which made it the first public energy company in North America to fully transition its principal syndicated revolving credit facility into a sustainability-linked revolving credit facility.

The Gibson deal introduced a margin adjustment incentive mechanism tied to the company’s commitment to reduce carbon emissions and to increase womens’ as well as racial and ethnic representation in its workforce and on its Board.

North American Transport

In April of this year, BMO and a North American transport company inked a sustainable financing agreement linked to the company’s goal to conduct its operations with minimal environmental impact while providing cleaner, more sustainable transportation services to its customers.

First SLL in Canadian History

In December 2019, BMO acted as Sustainability Structuring Agent for the first SLL in Canadian history, inking a $2 bn facility with Maple Leaf Foods, the world’s first major food company to become carbon neutral.

Being able to support companies’ efforts to be more sustainable is also compelling to lenders like BMO, allowing us to be our clients’ lead partners in the transition to a lower-carbon world. SLLs reward clients committed to improving their ESG profiles and serve as beacons to investors factoring ESG risks into their valuation models and investment decisions. With an SLL, a company signals that it recognizes the need to mitigate its ESG risks, and that it has a roadmap to improvement.

Challenges to Growth

Continued growth in the SLL market is not without its challenges, including real-time benchmarking and timely certification of KPI performance.

While the global pandemic catalyzed sustainability strategies and policies, it has also underscored how disruptive events skew benchmarks amid asymmetry of information.

Just as COVID-19 slowed the pace of production and lowered emissions, events like labor stoppages at home and trade wars abroad also create supply chain disruptions, making it more difficult for companies seeking SLLs to set KPIs for progress and to be able to say, ‘here’s where we are today, and here’s where we are going to.’

SLLs are also victims of their own success because the supply of third-party auditors to verify KPI performance cannot keep up with demand, especially in sectors that are traditionally less green and where more specialized knowledge is required.

In the Wake of COP26

Despite some obstacles, sustainability-linked instruments are poised for even more explosive growth, as we emerge from the pandemic and companies continue to focus on environmental and regulatory risks, including changing government policies. For example, with $103bn in Sustainability Linked Bonds in 2021, there is significant potential for growth as investors follow lenders’ lead and tap the SLB market.

Another likely driver this year will come as major governments around the world announce and implement new policies in the wake of the COP26 UN Climate Change Conference in Glasgow last November, and companies respond with even more focus on what the future will look like and to assess the associated opportunities and risks that will present themselves.

While today sustainable debt still only accounts for a small proportion of total global debt issued, it can only grow from here, and there may come a day where alignment of borrowing facilities with ESG strategy and sustainability becomes even more mainstream and demand increases from borrowers and investors alike.

The menu of options for ESG-focused issuers and investors has been considerably widened with the advent and evolution of SLLs and SLBs, bolstering the roster of available debt products to companies with far-reaching and ambitious commitments to sustainability.

For more information please feel free to reach out to John Uhren, Head, Sustainable Finance, Products and Strategy

John Uhren

Head, Sustainable Finance, Products and Strategy

View Profile