Follow the money

Last updated on January 3, 2023

If you want to understand where we’re heading, follow the money. No, not the shady Watergate-style corruption money. I’m talking about the ways in which large corporations are raising money in terms of bonds and loans.

Sustainability Bonds

Companies are issuing sustainability bonds — money that will help them finance projects with environmental or social benefit. They’re using this money to put the organization in a stronger position, lowering long-term risk and improving overall resilience. And when they reduce risk, they attract more capital. A win-win.

Some examples of sustainability bond issues include:

• Alphabet: In August, the parent of Google issued a staggering $5.75 billion in sustainability bonds. The money from these bonds will fund projects in eight key areas: energy efficiency; clean energy; green buildings; clean transportation; circular economy and design; affordable housing; racial equity; and small business and COVID-19 response.
• Verizon: In February, Verizon issued the first green bond from an American telecom company, $1 billion to fund projects in renewable energy; energy efficiency; green buildings; sustainable water management; and biodiversity and conservation, particularly in areas hit by natural disasters. The offer reached its $1 billion goal in just 25 minutes, and ultimately generated $8 billion in interest from investors.
• Visa: In August, Visa appointed a new Chief Sustainability Officer and issued a $500 million bond to fund projects including upgrades to buildings; water and energy efficiency projects; employee commuter programs; and research and initiatives focused on sustainable consumer behaviors. 

ESG Loans

But what if we follow the money to lending? There are also ESG loans — loans that are tied to a company’s environmental, social, and governance performance. These sound similar to the bonds discussed above, but they differ in some important ways. 

ESG loans can be used to fund general business purposes, but the interest rate is tied to the company’s sustainability performance. In other words, the interest rate drops if the borrower achieves its goals. But, rates can rise if sustainability goals aren’t met.

ESG loans can be used to fund general business purposes, but the interest rate is tied to the company’s sustainability performance. In other words, the interest rate drops if the borrower achieves its goals. But, rates can rise if sustainability goals aren’t met.

Back in February, JetBlue and BNP Paribas agreed to the first sustainability-linked revolving credit facility (RCF). This amended an existing $550 million RCF. It includes a provision that aligns strategic initiatives with ESG goals and objectives. Incidentally, JetBlue is the first airline to achieve carbon neutrality for all domestic flights, while BNP Paribas is actively divesting from fossil fuels.

Funding the Future

With governmental regulations being rolled back, we will need to increasingly rely on business to drive sustainability progress. These bonds and loans will go a long way toward funding the green reforms that we need to revitalize the economy and save money long-term.