14 April 2023

What is sustainability-linked funding?

In the last few years, the number of loans (including bonds and guarantee lines) made which contain sustainability-linked performance targets in the UK lending market has increased exponentially. Such loans are being made available to businesses in order to support businesses which have made commitments by identifying their individual sustainability performance objectives in environmental, social and governance matters, which the lending product incentivises them to strive towards. You can read more in our article Sustainability - Linked Lending and the future about the future of and opportunities in sustainability-linked lending more generally.

How does this tie in with Food and Drink businesses and the United Kingdom’s 2050 net zero commitment?

The UK was one of the first major economies to enshrine in law in 2019 an obligation to end its contribution to the global heating crisis by 2050. All businesses will need to play a part in the country achieving this goal; at present there is a limited – but growing body– of supporting legislation of applicability to businesses. However, in the food and drink sector, part of the global food supply chain, new legislation is emerging and we expect this to gain momentum in the next 5 years. Please also see our related report: Getting to Net Zero: the role of rural land

ESG captures responsible business commitments much wider than those requirements enshrined in legislation. It challenges businesses not just to identify stretching targets on environmental issues but also to look at their position in society, towards their workforce and customer base (social) and how the organisation and its decision-making is run, includes diversity issues, compensation and leadership accountability (governance).

Food and drink businesses face a myriad of ESG challenges including:

  • Sustainable packaging, including carbon labelling
  • Health concerns associated with products
  • Responsible sourcing of products / ingredients including deforestation and soil degredation
  • Fair working practices in the supply chain
  • Transportation and other carbon emission reduction, including renewable energy
  • Reporting and monitoring / auditing of sustainability targets

The Food and Drink Federation is a galvanising force for the environmental aspects of ESG as well as focussing on nutrition and social economic issues and offers help and support to the sector through multiple channels, including webinars and its Net Zero Roadmap Handbook.

For UK food and drink businesses which supply into the EU, an up to date knowledge and understanding of EU, and local, laws is essential. For example, Germany’s new supply chain law, which came into force on 1 January 2023 requires certain ESG information to be reported to German business customers to whom this legislation applies. The scope of this law widens after 12 months and there is similar legislation being introduced EU wide. 

Why should my food and drink business consider accessing sustainability-linked funding facilities?

Whilst larger multinational businesses will have had ESG on their corporate agenda for a number of years, evolving from the concept of being a responsible business to moving towards measurable initiatives and well-defined targets, smaller food and drink businesses may not have had the bandwidth given headwinds in recent years for this to be a focus of management. Case studies from larger food and drink businesses can also be of great use to mid-market businesses getting to grips with adopting their own ESG strategy.

Here are some good reasons to explore obtaining sustainability-linked lending:

  • Attractiveness to wider pool of funders which are focussing on sustainability-linked funding
  • Potential reductions in financing cost where goals are met over the life of the loan
  • Obtaining such funding also assists businesses:
  • evidencing ESG strategy in order to attract external equity investment
  • fulfilling shareholder / board desire to enshrine responsible business at the heart of the organisation
  • with other stakeholder engagement including attracting talent and brand reputation
  • to future-proof the business for potential legislative changes or for an exit
  • with reporting required in relation to supply chains.

What prerequisites will lenders require?

A lender will want to understand what a business’ ESG strategy is and see initial evidence this is embedded in the management of the business. Because this is an emerging area for lenders and all borrowers are at different stages of their ESG journey, it is not typical for a lender to impose targets and requirements on a business, but rather for lenders’ ESG teams to work with businesses to identify suitable stretch targets and KPIs against which to measure progress over time. Lenders are already asking potential borrowers these questions as part of their own credit processes even where sustainability-linked lending is not being sought.

We expect that as lenders’ experience in writing sustainability-linked loans grows, there will eventually emerge greater harmony on relevant criteria for specific industries and how measurements are evidenced. 

Whilst new loans are still being written and refinances completed without ESG performance targets, we expect this to become less commonplace as pressures grow on banks and debt funds alike to be lending to businesses which monitor ESG targets in order to comply with their own ESG or governance requirements from their boards, shareholders and/or investors. Getting ahead of the game will stand businesses in good stead for raising debt in the years ahead.

What external help is available?

If your business lacks internal ESG experience and is at the start of this journey we’d recommend speaking initially to trusted advisors and potential lenders on how to begin this process. 

Burges Salmon, with the team and tools we have developed internally, can help you identify material areas of concern which providing a springboard to discussions with specialised consultants.

Key contact

Racheal Ruane

Rachael Ruane Partner

  • Corporate Banking
  • Real Estate Finance
  • Asset Finance and Asset Backed Lending

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