Climate Change: developers step up efforts through sustainability-linked loans as Sun Hung Kai signs record deal

·4-min read

Sustainability-linked loans are gaining traction in Hong Kong in line with global trends as companies take steps to realign their profit-driven motive with the climate-change agenda.

Sun Hung Kai Properties, Hong Kong’s top home builder by market value, signed the biggest bank loan tied to sustainability targets in the city, adding to efforts among industry peers to reduce carbon footprint in their development projects.

The developer signed a four-year club loan amounting to HK$8.65 billion (US$1.1 billion) late last week, in a facility involving eight lenders including Bank of China (Hong Kong), HSBC and DBS. The loan, the biggest in the sector todate, was upsized from HK$3 billion due to strong demand, it said in a statement.

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The deal took the amount of such borrowings in the industry to US$3.25 billion this year, according to data compiled by Refinitiv. Sixteen companies across all industries have so far raised US$7.5 billion, versus US$2 billion in 2020.

Such loans are becoming a trend as companies and governments commit to initiatives to reduce carbon emissions and prevent global warming. Interest on sustainability loans typically drops with greater reduction in carbon footprint and other performance targets.

“More developers [are] raising funds through sustainability-linked structures” as opposed to green-building financing in recent past, said Tracy Wong Harris, vice-president of Hong Kong Green Finance Association. “The advantage of using these structures is that the proceeds can be used as general working capital instead of [being dedicated] to specific uses for the issuers’ projects.”

Property developers have tapped into the loan incentive, after leaning on green loans or bonds to fund their projects that tie their borrowing costs to environmental impact targets. New World Development, for example, have raised HK$3 billion over the past two years.

Swire Properties raised US$500 million from its maiden green bond issue in 2018 to fund green building, energy efficiency improvement and climate-change adaptation projects, among other targets.

However, the developer in 2019 converted a HK$500 million credit facility from Credit Agricole into a sustainability-linked loan. The interest rate would be reduced if the firm remains a constituent of the Dow Jones Sustainability World Index, and achieves an energy-usage intensity target. The discount and target were not disclosed.

Apart from Sun Hung Kai, this year’s hallmark sustainability loans included a US$700 million loan by Chinese commodities supply-chain manager COFCO International (HK). The firm could generate interest savings by trimming electricity consumption per square metre of floor space, showing improvements in its sustainability performance, and remaining a member of the Hang Seng Corporate Sustainability Index.

While admirable for a start, sustainability-related loans in Hong Kong are still relatively small. Globally, companies have raised US$454 billion so far this year, surpassing US$112 billion in all of 2020, according to Refinitiv.

On another front, Hong Kong is catching on with the boom in global sustainability-linked bonds, a form of financing that penalises issuers for failure to achieve sustainability targets. Local firms have sold US$546 million of these bonds this year from none in 2020. There has been US$84.1 billion of issuance globally this year, versus US$5.2 billion in 2020.

These bonds, however, have stoked concerns about “greenwashing” because some issuers are alleged to have been too lenient in setting their performance targets to avoid being penalised.

The tailor-made nature of both sustainability performance targets and the bond-coupon adjustment potentially gives rise to such concerns, Martin Dropkin, head of Asian fixed income at Fidelity International, said in September.

Additional reporting by Martin Choi

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