The Chain: Bunge’s Sustainability-Linked Loan Pegged to Transparency in Soy and Palm Activity

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January 17, 2020

Agriculture giant Bunge recently announced that it closed its first sustainability-linked revolving credit facility, worth USD 1.75 billion. The new facility agreement links Bunge’s interest rate to its performance on five sustainability targets. These involve cutting greenhouse gas emissions with improved industrial efficiency; increased traceability on its agricultural commodity supply chains; and increased sustainable practices for soy and palm oil. Bunge, as one of the largest agriculture commodity traders, is a major global player in both palm oil and soy, with Brazilian soy as its biggest market. Chain Reaction Research reached out to Bunge for more details about the loan but did not receive a response. Questions loom about how Bunge’s progress toward its sustainability goals will be measured, how the interest rate will be tied to Bunge’s performance, what the penalties the company will see for not reaching sustainability targets, and how Bunge plans to achieve its sustainability goals in order to keep interest rates low.

The company’s interest rate will track Libor, a benchmark interest rate used by major banks to lend with one another. The margin will vary from 0.3 percent to 1.3 percent based on ratings and sustainability performance, according to a filing.

Bunge’s new loan is part of the company’s longer-term plan to reduce its exposure to risks associated with deforestation. The company is particularly at risk due to its soy operations in Brazil, where it sources 38.6 percent of its soy from the high-risk Cerrado. In the Cerrado’s 25 high-priority municipalities, based on the Soft Commodities Forum (SCF) definition, Bunge claims that it can trace 93.5 percent of its soy volumes to farms. But this assessment is only for direct suppliers, as a large portion of its soy comes from indirect sources. The company agreed to bolster its no-deforestation policy in May 2018 amid pressure from institutional investors such as Green Century and New York State Common Retirement Fund. In late 2018, it revised its policy, but it has come under criticism for addressing only illegal deforestation rather than developing a broader strategy to also curb legal deforestation.

With this announcement, Bunge joins its competitors Wilmar (the world’s largest palm oil trader) and Louis Dreyfus Company (LDC) (a major actor in the Cerrado soy market), both of which receive sustainability-linked financing. More generally, Bunge’s announcement comes amid a broader uptick in sustainability-linked finance (see graphic below). The growing embrace of sustainability-linked financing options could lead early adopters like Bunge, Wilmar, and LDC to be seen as industry leaders in fighting deforestation if they meet required targets.

This trend in sustainable debt, which passed USD 1 trillion last year, is in part a response to growing concerns about the reputational risk financial institutions face when they provide capital to companies engaged in activities that exacerbate climate change, including deforestation. The trend will likely continue as pressure mounts on financial institutions to avoid funding such activities. Because companies that emit GHG emissions face similar reputational risks, an increasing number are embracing the opportunity to secure lower interest rates through activities that lower their carbon footprint.

Consequently, companies engaged in, or otherwise linked to deforestation are likely to find it increasingly difficult to secure financing, and companies that do secure financing may find that significant portions of their landholdings cannot be developed without violating the terms set out in their financing agreements.

Any sustainable financing mechanisms must be linked to the achievement of sustainability targets that are both meaningful and measurable, and financiers must put in place procedures for verifying recipients’ progress toward their goals. Both companies and banks would face sharp criticism if targets are not met, heightening reputation risk and possible backlash from consumers, investors, and regulators.

The effects of Bunge’s sustainability-linked revolving credit facility will depend on the details of the loan and whether it meets its intended targets. ABN AMRO, BNP Paribas, Rabobank, and Natixis helped Bunge align the loan’s sustainability criteria with the Loan Market Association’s principles. These principles include: 1) clear objectives/strategy; 2) ambitious and meaningful targets 3) transparent reporting of data; and 4) evaluation through external review.

 

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