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Sustainability-Linked Loans Come to Canada

Sustainable Finance December 12, 2019
Sustainable Finance December 12, 2019

 

Sustainability-linked loans (SLLs) have touched down in Canada, allowing lenders to support clients in achieving their sustainability goals and pursue a sustainable future together.

The loan category is gathering momentum globally, with initial demand coming from European, Asian and American investment grade companies with a strong commitment to improving their environmental, social and governance (ESG) performance.

What is an SLL?

Sustainability-linked loans are any type of loan instrument that incentivizes borrowers to achieve meaningful, predetermined sustainability objectives.

Similar to green bonds, SLLs allow lenders to work with clients to help them achieve a wide range of sustainability goals, attaching financial terms to targets that are negotiated and set between the borrower and the lender(s).  In some instances, an SLL can be structured to allow it to be categorized as both a green loan and a sustainability-linked loan.


SLLs were the fastest growing part of the ESG finance sector in 2018, with close to US$50 billion in product

SLLs were the fastest growing part of the ESG finance sector in 2018, with close to US$50 billion in product

Source: BloombergNEF, Bloomberg LP


Working Together to Improve Borrowers’ Sustainability Profiles

The goal of an SLL is to improve borrowers’ sustainability profiles by linking credit facilities to sustainability performance targets over a broad array of categories, from basic energy efficiency to reductions in greenhouse gas emissions related to the borrower’s line of business.


Examples of Sustainability Performance Targets

Examples of Sustainability Performance Targets

Source: LMA


Borrowers must clearly communicate their sustainability objectives, setting ambitious and meaningful sustainability performance targets that apply over the life of the loan. Sustainability targets can be internal - defined by the borrower in line with their global sustainability strategy - or external - assessed by independent providers against external rating criteria.

Unlike green bonds or green loans, proceeds from SLLs are not required to be allocated to specific green projects and can be used for general corporate purposes. Pricing grids are fixed at closing and any pricing incentive is based on whether the borrower hits or misses its sustainability target.


BMO Capital Markets entered into an agreement this week to provide Maple Leaf Foods with the first sustainability-linked loan in Canada.

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John Uhren Head, Sustainable Finance, Products and Strategy

John Uhren is Head, Sustainable Finance, Products and Strategy, at BMO. He leads product development and strategic initiatives across the enterprise, including ra...

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