UK retailer Sainsbury’s 5yr GBP200m “green loan” opens up a whole new area for green debt instruments

By Bridget Boulle

UK retailer Sainsbury’s recently announced that it’s joining the green debt space with the first ‘green loan’ to invest in carbon reduction and sustainability projects.

The loan will be used to finance renewables, energy efficiency, water use management and carbon reduction, some of which are part of the company’s Project Graphite – a plan to invest in various technologies such as photovoltaics and LED lighting in their stores.

This is a conventional corporate loan, not a bond; but there actually isn’t a great deal of difference. A bond is a type of loan that is usually tradable on a market, whereas loans are usually a simple agreement between a bank (in this case Lloyds and Rabobank) and the client (in this case Sainsbury’s). With a green loan the proceeds are directed towards green investments, in the same way that proceeds of corporate green bonds are ring-fenced to green projects.

This is the first time that a commercial loan has been structured to do the same as a green bond. Sainsbury’s say the structure of the loan is consistent with the Green Bond Principles.

Benefits are the interesting question here. With green bonds, investor diversification and possibly tenor are cited as reasons issuers take the green route, with reputational benefit in there somewhere as well.

Given the “investors” here – two banks – do not have a green mandate, that rules that out, and probably tenor as well. So the primary benefit is likely to be reputational. That’s OK for us – we’re very happy to see companies get kudos for the good work they do – it will encourage others.

Lloyds and Rabobank acted as “Joint Green Arrangers” (now that’s a term we hadn’t heard before) and Rabo as lead arranger.

We plan to include any future green loans in our tally of the green bond market.

Independent review by Sustainalytics

The loan framework received a third party review from Sustainalytics, an independent environmental, social and governance (ESG) research, analysis provider. This is their first outing as a green debt reviewer.

The Sustainalytics review is largely good; although when we started reading the review we were a little dismayed. Phrases like ‘These commitments are part of Sainsburys’ values which guide all key business decisions’ seem more like they come from Sainsbury’s marketing literature than an independent opinion and perhaps challenge the whole issuer-pays model of review that we’ve seen to date.

BUT but but. when we read the eligibility criteria we found one of the more detailed set of criteria we’ve seen out of any bond to date – hooray!

Eligible projects are detailed in full in the appendix and all look pretty green. Some of the projects within the efficiency section are a little unclear (it’s not clear what makes “powertrain technology” qualify, for example) and, as we’ve noted before, efficiency projects should always be subject to a hurdle rate. These don’t’ have a project-level hurdle rate but we note that Sainsbury’s company target is to reduce operational carbon emissions by 30% absolute and 65% relative, compared to 2005, so all these projects are in line with meeting this aim.

We were also impressed by the commitment to report on absolute emissions reductions (i.e. actual reductions in full rather than per ton of product or unit of revenue). This is important because absolute reductions are what we actually need to avoid climate change. Are the targeted emissions reductions proposed by Sainsbury’s ambitious enough on a global scale? I.e. if every company was as ambitious as Sainsbury’s, would we be on a 2 degree path? Well, that is very hard to say, but this is the lens through which companies should be looking at their emission reduction targets.

One thing that we haven’t seen before is that future reporting will be ‘endorsed by a 3rd party assurance provider’. We assume this means that future reporting will also be reviewed by Sustainalytics or a similar entity. This is a positive development, especially important because of the complex nature of Sainsbury’s pool of projects.

We were also interested to note that Sustainalytics stated that it ‘has determined that Sainsbury’s has adequate processes in place to ensure that the allocation of funds towards the eligible assets are tracked through the business’. This is an interesting step – as far as we know, other bonds that have used CSR/ESG ratings agencies to assess the environmental credibility of the bond have had a separate financial auditor do the fund tracking - in line with where their expertise lies. We have no opinion on whether or not Sustainalytics have the in house capacity to assess the process for fund tracking (we assume they do) so only note it here as an area of difference. They also detail the processes in their report, so transparency is maintained.

The only eligible project that raised our eyebrows was ‘water infrastructure’. Water infrastructure projects are too often judged green by default – this is not the case. For example, increasing water supply in water-stressed areas can lead to over-abstraction and resource depletion when greater efficiency of water use is what’s really needed. Similarly, water treatment can be hugely energy intensive, leading to increased CO2 emissions if the electricity comes from fossil fuel powered plants. So the question of whether a water investment is green or not is a nuanced.

Overall: breaking new ground.