Dutch banking group ING has provided a derivative product linked to sustainability performance – said to be the world’s first – to finance the construction of an offshore oil and gas processing plant.
The product – known as an interest rate swap – is being provided in connection with a $1bn, five-year revolving credit facility to listed Dutch oil and gas service provider SBM Offshore.
It comes as the World Federation of Exchanges, the industry body, has published a white paper on sustainability and commodity derivatives intended to stimulate discussion about the potential impact of sustainability issues on commodity markets.
Under the terms of ING’s so-called sustainability improvement derivative (SID), the swap spread or fee to be paid by SBM Offshore can increase or decrease, depending on the company’s environmental, social and governance performance.
Technically, this involves the introduction of a Sustainable Element (SE) to the pricing calculation of the derivative, in addition to the mid-swap rate, trading costs and ING’s profit margin.
Sustainability performance will be evaluated based on Sustainalytics data although both ING and SBM were unable to disclose the exact sustainability criteria tied to the SID.
SBM is 15% owned by investment group HAL Investments, the owner of Dutch financial newspaper Het Financieele Dagblad.
Conventional interest swaps involve the payment of a fixed rate to hedge against the volatility of interest rates. The most commonly traded are based on LIBOR which is the interest rate charged among banks for short-term financing.
The deal seems to be part of a growing trend of companies in high emitting sectors successfully tapping into sustainable finance, a development which has divided the market.
Earlier this month, Brazilian beef producer Marfrig raised $500m through ‘sustainable transition’ bonds, approximately two years after Repsol controversially became the first oil and gas company to issue green bonds.ING’s global head of Sustainable Finance Leonie Schreve says: “As a global systemic bank, we support all of our clients in their transition to more sustainable operations. We believe this helps create greater impact than supporting only what is already “green”. Companies setting an ambitious path towards sustainability are leading the way to tomorrow’s economy.
“We offer sustainability linked financial products to selected clients, primarily top performers and those who are in transition to more sustainable practices, to encourage continuous improvement. We think sustainably run companies are better credits over the long term.”
Schreve adds that the savings which SBM – which is chaired by former Van Lanschot Bankiers’ CEO Floris Deckers — stands to make will come “from the margin of the derivative product itself”, rather than a separate marketing or sustainability budget.
The SID is ING’s second pioneering financial product which aims to improve corporate sustainability performance.
In 2017, ING facilitated the world’s first sustainability linked loan (SSL) – a $1bn revolving credit facility for Dutch multinational Philips – as Sustainability Coordinator for a consortium of banks including BNP Paribas, Citi, Deutsche Bank, Goldman Sachs and HSBC.
Since then, SSL volumes have grown strongly, with $43bn recorded in 2018 and more than $81bn estimated for 2019.
Separately, the new paper from the World Federation of Exchanges notes that there is an “absence of a single set of sustainability standards that specifies requirements for a commodity to be deemed sustainable”.
It explores potential ways in which commodity derivatives exchanges may seek to address the impact of sustainability. The ideas put forward include creating new risk mitigation/investment tools and the possibility of incorporating sustainability elements into existing contracts.