The increasing importance of sustainable finance in corporations’ treasury plans alongside an acceleration of decarbonisation happenings in Southeast Asia companies. As the world’s biggest free-trade zone facing a predicted annual shortfall of $400 billion for climate financing, businesses seek to leverage funds that can come from outside conventional bank loans.
The two instruments that occupy the attention of the discussion are the use of Green Bonds and Sustainability-Linked Loans. They serve the same purpose in the environment although they do so in very different ways. Determining which will be applied depends on the specific green project a company calls for financing or whether the company is seeking to carry out resource efficiency changes throughout its business.
Green Bonds Put the Money Into Specific Projects
The Green Bonds are based on the principle of use of proceeds. The capital raised has to go towards qualified environmental projects namely renewable energy plants, environmentally friendly buildings, charging stations for electric vehicles, upgrades in energy efficiency etc.
This is often an appealing one for an ASEAN company that has a definite plan to invest in an infrastructure project, but the initial investment is significant. For instance, a solar developer may find it highly beneficial to secure dedicated capital for that project and have a way to illustrate its environmental effects to the investors.
The structure may allow for institutional ESG investors and, when market conditions are conducive, a possible ‘greenium’ via robust demand for green debt.
Cost of Green Bond Transparency
There are also administrative responsibilities brought by the advantage of project financing. Companies are required to have clear guidelines around which projects qualify, monitor the use of the proceeds and report environmental results.
Independent assessments can involve added complexity and costs, along with on-going impact reporting. This could be feasible for larger companies who have a well-established sustainability team or group. The reporting and verification obligations could be more cumbersome for smaller businesses.
Sustainability-Linked Loans Reward Performance
The funds don’t necessarily have to be directed towards a specific green project. Rather, the company’s borrowing cost will be tied to pre-set sustainability targets.
A manufacturing company may, for instance, commit to a certain percentage decrease in emissions for a period of set time. Above the agreed Sustainability Performance Target, the interest margin will be lowered, below the agreed SPT, it will be increased.
This is particularly beneficial for companies that are transitioning their operations in a way that “goes green,” instead of backfilling their existing operations with a single green project.This gives SLLs an advantage to companies that are making holistic operations transition rather than financing a single specific green asset.
Why SLLs May Suit More ASEAN Companies?
SLLs can be relevant with your SMEs, manufacturers, logistics companies as well as mid-sized companies, owing to their flexibility. These companies might wish to optimise their energy use or minimise their climate footprint or implement a production change that does not fit into an elegant green-bond scheme.
As a financial benefit, there is a direct link made between sustainability performance and the cost of borrowing. For management teams, it can be a way to focus sustainability as a separate reporting exercise instead of it becoming a numerable financial target.
Which Instrument Should ASEAN Businesses Choose?
Green Bonds may be more appropriate for a large, well defined green asset and access to capital markets for a company. The format could offer tasty terms and lower levels of investor access if it meets the strict reporting standards of the issuer.
If a business wants to retain flexibility in its capital for business operations and slowly build up its environmental performance then it may have more to gain from an SLL. The bank-loan structure is simpler to fit into a financing structure to an ongoing relationship and/or a revolving credit facility.
The key is, none of the instruments is “green” by default. The value of them is based on the trustworthiness of the targets set by the company, transparency of reporting and verification of the quality of the targets.
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Real Issue Is Credibility
People will ultimately identify with the sustainable finance market size of ASEAN based on the number of green instruments being issued rather than the real environmental benefits obtained from these instruments.
Green Bonds will stop the funds needed from being diverted towards non-approved projects, SLLs can provide financial incentives towards broader transformation. Both of these, however, need credible data as well as protections against greenwashing.
FAQs
What would be the key difference between a Green Bond and an SLL?
With a Green Bond, the money from the loan must be applied to a green project and with an SLL, the loan conditions are tied to the company’s sustainability performance targets.
Which instrument has more degrees of freedom?
The flexibility of Sustainability-Linked Loans is usually that the proceeds may be spent for a wide array of corporate investments, unlike ESG-type loans that are frequently approved to fund renewable energy initiatives.
Do Green Bonds fare better for big organizations?
They can be especially appropriate for bigger enterprises with large green initiatives and the systems required for environmental reporting and independent verifying systems.
