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ESG Performance for Financial Incentives?








HSBC China recently provided a sustainability-linked loan to a shipping logistics group in support of the customer’s corporate sustainability and the country’s broader targets of “emission peak” and “carbon neutrality”.

At Shanghai Yangshan Deep-water Port, roars are heard one after another as fully-loaded container ships sail in every day. With low cost and low energy consumption, water transportation has become an essential part of the transportation industry. According to statistics, in 2020, the annual container throughput of Shanghai reached an unprecedented 43.5 million TEUs, making it the world’s top port for the 11th consecutive year.

However, with ever mounting challenges for the global environment, the transportation industry has come under increasing pressure for environmental protection, and thus green transformation becomes an urgent priority. As China’s 14th Five-Year Plan emphasizes the importance of “promoting green development and ensuring harmony between humanity and nature”, it has become an inevitable trend to balance economic growth with environmental protection and stay focused on green development. At the same time, for businesses, such development not only helps to protect the environment, but also drives lower costs and better earnings.

SITC International Holdings Company Limited (hereinafter referred to as "SITC"), a leading shipping logistics group, learned this from its own experience. As an international marine shipper, the company strives to align its daily business operations with the concept of sustainable development. While hailed as the company’s action to fulfill its corporate social responsibility, these efforts also helped to reduce its financing costs.

Under a structured credit facility provided to SITC recently, HSBC China launched a sustainability-linked loan (SLL) that links the cost of finance to the company’s performance in meeting its sustainability goals. The product is designed to incentivize the bank’s customers to reduce their emissions and to operate sustainably so as to contribute to China’s transition to a low-carbon economy.

“China is a global pioneer in promoting green development. The country announced to the world last year a timeline for its emission peak and carbon neutrality. The newly published '14th Five-Year Plan' and Long-Range Objectives through the Year 2035 further confirmed the importance of green development and provided concrete guidelines for future low-carbon actions.” said Jim Ma, Executive Vice President (designate) and Head of Commercial Banking, HSBC Bank (China) Company Limited.

 

“HSBC is committed to helping customers achieve low-carbon transformation by offering innovative banking products. We do our best to support the development of low-carbon technologies and make a meaningful contribution to China’s emission reduction efforts. As an innovative banking product, the sustainability-linked loan offers greater flexibility than a green loan or green bond. It is the latest addition to our diverse collection of banking tools for businesses to operate sustainably with renewed impetus.”

Operating sustainably for cost savings

In recent years, deep thinking about how to develop in harmony with the environment and society has prompted more and more companies to mainstream the concept of sustainability into their business development. As a result, the concept of environmental, social and corporate governance (ESG) has become increasingly popular.

After three decades of development, SITC has developed a set of internal rules and an environmental management system that focus on the reduction of various pollutants and greenhouse gases. The company has been striving to reduce emission of gaseous pollutants by reducing fuel consumption and using low-sulfur oil in its shipping activities.  

Given SITC's long-term efforts in energy saving and emission reduction, HSBC took the initiative to provide a sustainability-linked loan as part of the overall solution for the company’s need for credit. Based on the characteristics of the shipping industry, the bank’s sustainable financing team developed a set of sustainability goals appropriate to the company’s current situation and vision. HSBC provided a solution that helped the customer gain cost savings from sustainable operations. This is the first-ever loan of its kind for SITC.



What is Sustainability-linked Loan?

Sustainability-linked loan is a new product of green finance. In May 2020, the Loan Market Association, the Asia Pacific Loan Market Association and the Loan Syndications and Trading Association jointly released “Principles for Sustainability-Linked Lending”. According to document, a sustainability-linked loan is any loan instrument or standby financing method such as secured line, guaranteed line and letter of credit that provides incentives for borrowers to meet pre-determined sustainability goals. The lender may adjust the pre-set spread based on the borrower's performance against the sustainability goals.

In short, companies can access preferential interest rates for their loans by meeting pre-determined sustainability goals on greenhouse gas emissions or ESG. For them, this is a win-win solution in terms of both achieving environmental goals and reducing financing costs.

HSBC’s low-carbon commitment

In October 2020, the HSBC Group announced its plan to help its customers achieve net-zero emissions by 2050 and the same target for its own operations and supply chain by 2030, in line with the targets set by states parties in the Paris Agreement. At the same time, HSBC is also committed to providing between US$750 billion and US$1 trillion to support sustainable development financing and investment by 2030.

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