Building a Portfolio

Sustainable Finance: Linking ESG Goals to Lending Programs

A new sustainable finance program that links interest rates to ESG goals hopes to encourage better results for the low-cost private schools that serve nearly one-third of poor students in India.

Offered by the Michael & Susan Dell Foundation, the variable-rate loans include financial incentives that encourage leaders to improve learning, according to the Stanford Social Innovation Review. If the students’ test scores improve 5% to 10% in two years, the borrowers get up to a 10% rebate on their loans.

Here’s an overview of the program and a look at the potential for broader application of ESG-linked loans.

How the India Program Works

The program is believed to be one of the first of its kind. The Dell Foundation provided local lender Indian School Finance Company (ISFC) with a $2 million, three-year loan at 12.5% interest to cover the total rebate amounts and student testing costs. Even if all 96 schools in the pilot hit their learning targets, the loans would still generate 9.4% interest to Dell, the SSRI article noted.

For example, one school received a five-year loan of $29,000 so that it could add 11th and 12th grades. If the school’s test scores were to improve over the two-year period, it would receive a rebate of up to $2,900.

“This win-win approach to impact investing can be honed and applied beyond just low-fee private schools in India or Africa,” said Rahil Rangwala, director of the Family Economic Stability portfolio, who oversees some of Dell Foundation’s investments in India.

Sustainable Finance with ESG Goals: A New Market?

“Green” credit and interest rates tied to ESG goals have found more traction in the European investment market than in the US, according to Reuters. In one notable example, French food product company Danone announced that it had linked ESG criteria to its €2 billion credit facility led by BNP Paribas.

Danone kicked off the program with a €300 million bond that requires responsible farming, social inclusiveness, nutritional research, and healthy food initiatives, the company announced recently.

A number of other commercial lending programs with ESG goals have been introduced, for example by health technology company Philips and financial services firm ING. In late 2017, ING partnered with palm oil producer Wilmar International Limited on its first sustainability performance–linked loan in Asia. Wilmar converted about $150 million, a portion of its existing revolving credit facility, into a sustainability performance–linked loan.

Weighing the Pros and Cons

Still, the programs are new and it will take time for them to deliver results. The Dell Foundation will have some feedback later in 2018, though Rangwala noted that the Indian school looking to expand is using the baseline testing results to make improvements to its curriculum.

While interest is growing in ESG-linked loans, investors may need more clarity on the terms—including ESG goals that are specific and measurable—for the market to take off.

The market will also need more guidelines, particularly in the US. The Loan Syndications and Trading Association is developing a framework for green loans to encourage expansion in the US, according to Reuters. The US market’s lag behind that of Europe is tied to a lack of corporate and regulatory support, it noted.

“Europe is way ahead of the US in terms of green loans, but more and more US companies are starting to get interested,” said Jorge Gonzalez, global head of corporate loans at Spanish bank BBVA.

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