G8’s SLL is for volume of A$350 million. Westpac is again the sole SLL structurer with Commonwealth Bank of Australia and Royal Bank of Canada joining as additional MLAs.

IPL’s transaction is particularly noteworthy because of the nature of IPL’s business. Ammonia is a key component of the fertilisers and explosives it manufactures, and ammonia production is highly emissions-intensive. This sector is recognised as “hard to abate” – defined as one where existing decarbonisation technologies are higher cost than available higher-carbon alternatives.

Bringing sustainable-finance principles to the hard-to-abate universe is something of a holy grail for the sector. Doing so potentially offers the greatest impact for investment capital, by financing and incentivising these companies to transition away from emissions-intensive operations despite the headline cost of doing so.

There will inevitably be heightened focus on the commitments being made by hard-to-abate companies as lenders seek to avoid accusations or the reality of greenwashing. The PR benefits of financing ‘brown companies’ transition are also less obvious than those accruing to, for instance, lending to renewable-energy projects or others that are inherently green.

IPL itself is going through a process of gradually ramping up its environmental strategy. Its Melbourne-based CFO, Nick Stratford, says this means making ambitious commitments but ones it is able to keep. For instance, while IPL is a founding member of Australia’s Climate Leaders Coalition and a 10-year inclusion in the Dow Jones Sustainability Index it is still working through how to shape the business to address a net-zero emissions target.

“We looked at net-zero by 2050 last year but there are some technology steps in our roadmap that needed further investigation – and we didn't want to make a commitment to something we didn’t have a plan to deliver,” Stratford explains.

On the other hand, technology options relevant to emissions transition in IPL’s business are increasingly available. Stratford says this space is evolving rapidly and the company’s confidence about a trajectory to net-zero is growing. But it remains keenly aware of not overpromising.

He tells KangaNews: “We want to give the market a clear view that transition is something very important to us and that we definitely see the need to change the way we operate in the short, medium and long term.”

This is the backdrop to an SLL process that IPL and Westpac describe as deeply rigorous. Michael Chen, head of sustainable finance at Westpac in Sydney, tells KangaNews the inclusion of environmental criteria, and in particular a KPI addressing emissions reduction and how it lines up against a net-zero target down the track, was “non-negotiable” for the bank.

For IPL, the SLL process meant not shying away from its emissions profile and therefore developing loan criteria that establish clear and measurable standards for the company to achieve in the environmental space specifically.

“We wanted to formulate KPIs that we believe are appropriate to a company in our industry – not going for soft targets that are only there for the sake of publicity or simply as a token,” explains Uri Gordon, general manager, treasury at IPL in Melbourne.

This was no straightforward task. Chen says: “IPL’s KPIs were developed over a long period of time in what was a really good and well thought-through process. But it is certainly true that this deal was difficult to structure; they don't talk about hard-to-abate sectors for no reason.”

The company worked to identify areas it will be working on over 1-3 years and even beyond the end of the loan facility, incorporating in this process a range of business units including the manufacturing, fertiliser, explosives and corporate sustainability teams. It settled on three areas of focus for the SLL KPIs (see box), which it then took to its whole banking group.

Chen reveals that the year-on-year KPI targets in the IPL facility ratchet over its life, providing an incentive for continuous improvement and transition – to maintain pricing benefit and avoid penalty.

He continues: “Sometimes, the harder a deal is to structure from a sustainable-finance perspective the more worthwhile it is. It’s in these ‘moments of tension’ when we often make advancements with tangible ESG outcomes for the borrower as well as shifting the debate for the whole sustainable-finance industry.”

Nick O’Brien, head of consumer and industrial at Westpac in Sydney, says: “It is very rewarding for us to be able to highlight that industries that have traditionally been considered less likely candidates for sustainability initiatives are embracing the opportunity to explore funding arrangements that encourage the achievement of innovative sustainability performance targets.”

The detailed process continued when it came to engagement with individual lenders. Having developed its KPIs, IPL engaged with its banks in a series of one-on-one calls – using this approach rather than a ‘town hall’ in order to drill down in detail on each lender’s requirements and priorities.

Lenders in the IPL facility were clearly demanding, but this does not mean they were not ready and willing to support an appropriately structured SLL from the borrower. IPL describes a bank group that is increasingly engaged with environmental, social and governance integration and resourced to perform it.

“Different banks applied different criteria, with most not only relying on their credit committee but also using an internal specialised sustainability committee to determine that IPL’s KPIs were measurably aggressive enough. They wanted to be sure the SLL was not just a name but was a credible ‘green’ structure,” Gordon reveals.

In fact, IPL was able to cover all its bank facilities with the SLL overlay rather than selecting a specific tranche.

Stratford tells KangaNews: “It was an important initiative for us as a company but also in the context of our relationships with the banking sector. Banks, and especially Australian banks, are moving in this direction but there was clearly room to work with our full panel of lenders – domestic and international – to highlight the importance of sustainability to the company’s direction.”

G8 also describes a happy alignment of corporate priorities with an increasing focus from banks to offer SLLs. “We decided almost immediately on a sustainability-linked product – use-of-proceeds wasn’t as relevant to our needs or our capital structure,” says Gary Carroll, G8’s Brisbane-based managing director and chief executive. “The issuance was a product of our strategic priorities and the ongoing conversations we have been having with our banks – everything lined up really well with a sustainability-linked structure.”

Whether sustainability-linked structures for hard-to-abate or social-focused issuers could be achieved in bond format, and in particular in the domestic market, remains an open question.

An Australian issuer – Sydney Airport – made a global breakthrough with its issuance of a sustainability-linked bond (SLB) tranche with two-way pricing steps, in 2020. This was included in a US private placement transaction, however, and only provided one relatively small tranche of a larger, vanilla deal.

IPL itself last issued in Australia in 2019 – a A$450 million seven-year transaction – and has no need for further capital-market issuance in the foreseeable future. Gordon says that, “based on conversations we have had over the past 12 months”, the company believes bond investors would still be more comfortable with a use-of-proceeds green bond from a credit like IPL than an issuer-wide sustainability-linked structure.

Chen is somewhat more optimistic, noting that there is no reason why a sustainability-linked bond would need to have a fundamentally different structure from an SLL. There could be nuances to take into consideration for bond investors, he adds – for instance around coupon adjustments and number of review periods.

“But certainly I don't see any reason why we couldn't replicate this kind of structure in the bond market,” Chen adds. “We have heard investors say that they would really welcome a SLBs in the Australian market, particularly ones that incentivise transition activities.”