Green loans. or GL, and Sustainability Linked Loans (SLL) are two financing instruments made available by banks to data center operators for projects aimed at improving the environmental performance of their facilities. Green loans are very similar to conventional loans, except that borrowers must adhere to the guidelines set out in the Green Loan Principles developed by the International Capital Market Association. Sustainability-linked loans represent a more complex financing scheme that adjusts the interest rate on the environmental performance of the borrower based on the individualization of key performance indicators, or KPIs, and the achievement of pre-established performance objectives for each KPI. In 2020, Aligned Data Centers was the first operator to use such a loan structure. In August 2021, a syndicate of banks led by Banco Bilbao Vizcaya Argentaria SA converted a loan granted to Nabiax into a sustainability-linked loan. Similarly, in September 2021, AirTrunk obtained the conversion of a pre-existing loan into a loan linked to sustainable development with the advice of Crédit Agricole SA.
The Bank for International Settlements estimates that bank loans are the main source of financing in most G20 economies. Indeed, bank loans are often the only source of financing for small and medium-sized enterprises, which form part of the backbone of many advanced and emerging market economies. Therefore, we believe that green and sustainability-linked loans could surpass green bonds as financing options available to data center operators to facilitate the industry’s green transition while reducing the costs of operation of their facilities.
Bank loans still represent the main source of corporate debt financing in many advanced and emerging countries. The Bank for International Settlements estimates that in the third quarter of 2021, the volume of bank lending outside the financial sector amounted to 112% and 82% of the gross domestic product of emerging markets and advanced G20 economies, respectively. However, the figure varies considerably between G20 countries. We can observe market-based financial systems, as in the case of the United States, where bank loans account for less than one-third of total credit flowing out of the financial sector, and bank-based financial systems, as in the case of China, where bank lending is equivalent to 180% of GDP (almost all domestic credit leaving the financial sector). Japan can also be considered a bank-based financial system, as total bank credit flowing out of the financial sector is more than double non-bank credit. Significant variability is also observable in the euro zone, where there are banking financial systems, as in the case of Germany, and hybrid systems, as in the case of France. Nevertheless, with the exception of the United States, bank credit accounts for (at least) almost half of total domestic credit in all countries.
In the context of the predominance of bank credit in the financial systems of the world’s largest economies, GLs and SLLs are particularly suitable financial instruments for companies that cannot raise funds through the issuance of corporate green bonds. for various reasons relating to company size, business practices or the level of financial development of the country in which they operate. Small operators, in particular, may be prevented from issuing green bonds in the capital market due to a lack of reputation, the high costs of certification fees and the relatively smaller size of their businesses.
GLs have the same structure and conditions as conventional loans, except that they are granted explicitly by banks to finance corporate green projects and are certified by international consortia and professional banking associations.
SLLs are structured so that the rates paid by borrowers vary based on the achievement of contractually established sustainability performance measured using key performance indicators. In other words, borrowers benefit from lower interest rates by reaching pre-established benchmarks for environmentally sustainable practices. Therefore, SLLs incentivize borrowers to improve their environmental, social and governance performance in return for interest payment relief.
Principles of Green and Sustainability-Related Lending
The taxonomy of these two bank lending instruments has been published in the Green Loan Principles, or GLP, and Sustainability-Linked Loan Principles, or SLLP, as established by the financial services trade groups Asia-Pacific Loan Market Association, the Loan Market Association, and Loan Syndications and Trading Association under the coordination of the International Capital Market Association, or ICMA.
As with the Green Bond Principles, both taxonomies were developed to facilitate environmentally sustainable economic activity and to support the transition to a low carbon economy by providing voluntary guidelines for lenders and borrowers.
The GL taxonomy is exactly the same as that developed by ICMA in the Green Bond Principles. Green loans are any lending instrument granted by banking institutions to finance or refinance green projects, including revolving credit facilities. To be considered “green”, a loan agreement must include four elements:
* Use of the product.
* Project evaluation and selection process.
* Revenue management.
SLLs are any loan instrument and conditional facilities granted by banks to incentivize the borrower to achieve pre-established sustainability performance. Therefore, the taxonomy of SLL is slightly different from that of GLP.
An SLL should have five main components:
* Selection of key performance indicators.
* Calibration of sustainability performance objectives, or SPTs, by KPI.
* Characteristics of the loan.
The relevance of KPIs and SPTs to establishing the legitimacy of a sustainability-related lending market is highlighted in the guidelines included in the Principles. KPIs should be relevant and meaningful to the borrower’s entire business, measurable or quantifiable on a consistent methodological basis, and capable of being compared to an external benchmark or definitions to help assess the level of ambition of the SPT.
Potential Benefits of GLs and SLLs for Data Center Operators
We have identified four key benefits of GLs for data center operators:
* Improved sustainable management of facilities: The GLP stresses the importance of the “project evaluation and selection process” and the “reporting” components to ensure that the green loan granted by the bank will produce positive environmental effects. In the case of the data center industry, operators can dedicate green loan proceeds to energy efficiency projects, improving the sustainability of their facilities while reducing operational costs related to electricity consumption.
* Gaining public buy-in by demonstrating a commitment to promoting sustainable facilities: Joining a green lending program can signal a commitment to sustainability for potential investors and clients pursuing sustainability goals in their science goals or business association agreements.
* Strengthening the funding base by building relationships with new banking institutions committed to sustainability: Data centers operate in a capital-intensive industry where capital deployments have a payback period of approximately three to six years. Therefore, data center operators must establish long-term relationships with banking institutions willing to provide patient capital for sustainability-related projects.
* Ability to raise funds on relatively favorable terms due to reduced transition risk: Data center operators publicly committed to sustainable development goals are much less exposed to the risk associated with the transition to a low carbon economy which includes regulatory changes, the introduction of carbon tax and charges, changes in customer preferences, etc. can access financing on more favorable terms than operators perceived as “unsustainable”.
SLLs share the same benefits as GLs, with the added benefit of providing cheaper financing. By offering a sustainability-linked pricing mechanism that adjusts the interest rate based on the environmental performance of a data center facility, an SLL incentivizes a borrower to reduce carbon footprint and improve energy efficiency of its installation to reduce borrowing costs.
Overall, the development of a larger GL and SLL market would benefit the entire data center industry, as it would also allow smaller operators who cannot issue green bonds to access green financing programs to improve their sustainability performance and reputation.
Loans linked to sustainable development Aligned-ING, Nabiax and AirTrunk-Crédit Agricole
In September 2020, ING Groep NV granted the first-ever sustainability-linked loans in the data center sector by granting Aligned a loan facility with a pricing schedule linked to pre-defined environmental performance targets. The $1 billion loan package was structured into a $750 million term loan and a $250 million revolving credit facility, with interest payments tied to performance metrics contractually agreed keys and sustainability performance targets. In particular, interest rate margins were linked to specific environmental key performance indicators, including sourcing 100% of annual electricity consumption from renewable energy sources with net zero emissions of by 2024. After successfully meeting all sustainability targets in July 2021, Aligned was awarded an additional $250 million sustainability loan contract.
In August 2021, the Spanish data center operator Nabiax also negotiated the increase of its existing syndicated loan from €285 million taken out in 2019 to €320 million and its conversion into a sustainability-linked loan arriving maturing in 2026.
Similarly, in September 2021, Australian data center operator AirTrunk converted its A$2.1 billion loan facility to a sustainability-linked loan with advice from Credit Agricole. Interest rates were tied to specific ESG KPIs related to diversity and inclusion, carbon neutrality and energy efficiency through energy use efficiency targets.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.