More retailers than ever are putting money where their mouth is and linking environmental, sustainable and governance (ESG) targets to future financing.
- Many retailers have implemented strategies to reduce their impact on the planet
- Some, including Joules, Tesco and Kingfisher, have linked sustainability or ethical targets to their financing agreements with banks
- Is this trend towards sustainable financing here to stay?
Being considered a sustainable brand was once seen as desirable but not necessary to succeed.
Now, as global awareness of the climate emergency grows, some retailers face a quandary - go green or face the risk of financiers closing their wallets to financing requests.
Many retailers have implemented strategies to reduce their impact on the planet, following high-profile campaigns by environmentalists such as Sir David Attenborough and in the run-up to this year’s COP26 climate change conference.
It matters to retailers not just because many are keen to be good corporate citizens, but because ESG is increasingly a factor in relationships with partner companies such as lenders - banks are seeking to step up on the ESG front too.
The ESG agenda is also taking on more importance among investors, as reactions to the controversy over Boohoo supplier factory conditions or response to Deliveroo’s IPO showed.
So retailers are increasingly holding themselves to account by linking sustainability or ethical targets to their financing agreements with banks. By achieving their goals, retailers are rewarded with better funding terms.
From grocery to fashion to homeware, well-known retailers have started to follow that course of action.
The benefits of going green
Last year, Tesco renewed a £2.5bn financing arrangement, establishing links to sustainability targets for the first time. The revolving credit facility’s interest is linked to the achievement of three sustainable targets set out by the retailer; emissions, renewable energy and food waste.
Tesco will benefit from a lower interest rate loan margin if it delivers on its green promises.
As well as giants such as Tesco, smaller UK retail brands are leading the way in aligning extensive targets to their financing.
Joules chief executive Nick Jones describes switching a funding arrangement with Barclays into an ESG-linked financing agreement as “a natural next step.”
In May, Joules’ funding arrangement, disclosed in May, was converted into an ESG-linked financing model. The funding arrangement is made up of both a £25m revolving credit facility and £9m term loan. The linked targets include reducing its carbon emission intensity, delivering 100% more sustainable materials in the manufacturing process and increasing its employee engagement score.
“These strong commitments to operating responsibly and sustainably and delivering were formed a number of years ago with the launch of our Responsibly Joules framework,” explains Jones.
Kingfisher also gets in on the act
B&Q owner Kingfisher established a £550m credit facility linked to ESG objectives. Kingfisher will benefit from reduced interest rates if it cuts emissions and reaches 100% sustainable materials for its products. The goals formed a key part of the Powered by Kingfisher strategy originally launched in 2020.
Globally, there are few companies more well versed in achieving sustainable targets than Natura & Co. The Brazil-based business, which owns Avon, Natura, The Body Shop and Aesop, has been carbon neutral since 2007.
The group’s carbon emissions fell by a third between 2007 to 2013. Between 2013 and 2018, there was a further 11% reduction.
In May, Natura & Co raised $1bn in a sustainability linked bond. Vice president of sustainability and group affairs Marcelo Behar says: “It is very consistent with Natura’s trajectory [due to] the two main elements of the bond - on one hand, carbon emissions, one the other hand, packaging and circularity.”
The bond commits Natura & Co to reducing greenhouse gases by another 13% by 2026. Over the same timeframe, it also aims to reach 25% of post-consumer recycled plastic in product packaging.
The goals set out in the bond are just the beginning for Natura & Co: “We committed to investors to have an external measurement for those specific targets and to disclose them annually on our investor relations webpage.”
“Besides those commitments, we also have commitments for the next 10 years for the four brands in the 100 countries where we operate with almost 40,000 people and 3,000 stores. What we proposed for the bond is totally linked to what we propose for the group as a whole.”
Behar believes that increased sustainability targets are necessary for retailers to make a lasting impact: “I think it provides the correct connection between how [companies] can foster the change that they must do in their business… and also how they finance their activities.”
Green light for financing across the globe
It is a trend that is expected to continue. HSBC head of retail and leisure James Sawley says that an increased appetite for green financing is evident: “We’re increasingly seeing that retailers are very interested in the concept of sustainability linked loans (SLLs) as it’s a great way to demonstrate to the world their ESG credentials, and if they hit their ESG performance targets it can save them money on their interest margin.”
Jones too believes that linking ESG targets to funding arrangements is here to stay: “I certainly think this will become more commonplace, not only for Joules but for the wider industry - anything that helps to drive sustainability within our sector is a good thing.”
Kingfisher’s head of responsible business Caroline Laurie agrees: “By linking ESG targets to financial products, businesses and financial institutions are showing a tangible commitment to the sustainability agenda.”
For retailers, paving the way towards a greener tomorrow requires extensive planning and measurability is a critical success factor.
Director and ESG lead in KPMG LLP’s debt advisory group Marc Finer says that the main challenge for a retailer is creating the targets themselves. He recommends that companies first ask themselves “what is an appropriate, specific, measurable ESG commitment to commit in our loan?”
He says: “In order to incorporate those aspects into your loan agreement, either in terms of how you will use proceeds of the loan or how you’re going to conduct yourself as a retailer, you do need to come up with those targets first. This isn’t really a financing question, this is a strategic board level question.”
Put your targets in place
For some retailers that may be easier than for others because the targets may already feature in existing ESG strategies, as was the case for Joules and Kingfisher.
It was the same for Tesco. Existing KPIs of its Little Helps Plan sustainability strategy were linked to the credit facility.
Companies need to create goals that relate to their business and are deemed achievable. Sawley says: “These KPIs need to be measurable and ambitious, externally ratified and most importantly should be meaningful to the business, its brand and its customers.”
After the targets have been agreed upon, the company’s progress will be tracked. Finer explains: “It is increasingly commonplace that lenders require some sort of upfront or ongoing independent external verification that the ESG financing commitments that you’ve made have been met.”
Do shoppers actually care about going green?
Retail analyst Nick Bubb says that although it is not clear how much money companies will save through ESG-linked financing, it is a valid corporate response to pressing issues.
That said, he wonders whether such initiatives filter through to consumers. He says: “There’s no evidence at all that consumers are interested in the supply chain problems at Boohoo, given how well they’re doing.” Shoppers may not be keeping up with announcements related to ESG goals.
Greg Brown, a partner at Allen & Overy, the law firm that acted as lenders’ counsel on Tesco’s deal, explains: “What [a deal] has built into it are extra elements linked to hitting certain sustainability targets and if the company does well, hits those targets, it gets a reduction in pricing. Normally it also works the other way. If a company misses a target, then the pricing gets more expensive.”
A lack of standardised regulation across financing arrangements has come into question as greener funding models grow in popularity.
Brown says there’s a need for more regulation: “So far, it’s been a little bit like the Wild West in that from deal to deal, the parties decide what the targets are, they decide how they’re reported, they decide who is providing the information.”
“There are legitimate concerns whether that’s greenwashing or allows for greenwashing. Who’s checking if the targets are genuinely meaningful? Who’s checking if the data that underpins them is fair and accurate?”
KPMG’s FS regulatory insights centre ESG lead Julie Patterson echoes this. She has looked at the lack of consistency across corporate reporting in this space: “How are [companies] defining ESG? There’s a definition issue. There’s then a standards issue about how you report. In order to report, you have to agree on metrics and you have to agree on underlying methodologies. Then critically you have to have the data to be able to do the calculations to check the metrics to disclose them.”
Patterson points to moves across the globe to improve clarity in this space, including the EU Sustainable Finance Taxonomy, although this has not been adopted in the UK due to Brexit.
There are also international efforts to enhance consistency. Patterson explains that the International Financial Reporting Standards (IFRS) are set to create a sustainability standards board to “come up with some globally recognised terms and standards for reporting.”
“In order to report, you have to agree on metrics”
As sustainable financing becomes more globally recognised, it is increasingly evident that linking ESG targets to company financing is not a passing fad.
Finer concludes: “If [retailers] are not taking it seriously, they need to get serious.”
“From a financing perspective within a relatively short time frame, we will no longer be talking about ESG financing because lenders will just expect those commitments to be made in every loan agreement.”
“If you can’t make them, it won’t be a case that you pay a bit more, you just won’t be able to get the loan.”
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