Sustainability-Linked Loans: What They Are, How They Work and Why They Matter
At Blackstone, we innovate solutions to help make the companies we work with stronger and more competitive. The sustainability-linked loans (SLLs) structured by our Credit business – one of the largest lenders of private credit in the world – exemplify that innovation and meet growing investor and borrower interest. SLLs tie the loan’s interest rate to a company’s ability to achieve agreed-upon sustainability goals. This tool both incentivizes the borrower to deliver measurable results and enables Blackstone to leverage its capital and resources to strengthen businesses and support their sustainability initiatives.
Rita Mangalick, Global Head of ESG for Blackstone Credit, explains what this tool is and why it matters – for Blackstone, for the companies we partner with and for the global energy transition.
What They Are
Sustainability-linked loans are loans where a portion of the interest rate is linked to the borrower’s ability to meet sustainability targets. An SLL incentivizes companies to achieve these targets so they can secure a lower interest rate.
We use a five-step process to structure sustainability-linked loans.
1) Select key performance indicators (KPIs). These KPIs are generally expected to be based on a credible methodology, be quantifiable and material to the borrower’s core business.
2) Develop sustainability performance targets (SPTs) for each KPI. We try to strike a balance between ambition and achievability, supporting a company as they push themselves beyond their “business-as-usual” comfort zone.
3) Determine the interest rate ratchet. This shows how much the borrower’s interest rate will change based on whether or not they achieve their SPTs. We also set a testing timeline for the duration of the loan and determine how frequently we measure their progress.
Blackstone differs from many other private lenders in that we don’t just lower interest rates when a company hits their targets; we may also raise them if they fail. We believe that this two-fold approach energizes companies to meet their sustainability goals, which in turn can strengthen them and increase the value they can generate for our investors.
4) Collect reporting data. We gather this data from the borrower – usually on an annual basis, but more frequently if it supports a borrower’s progress towards their goals.
5) Verify the data. All borrowers are required to use an independent third-party advisor for verification of performance against their SPTs each year. This process reflects our commitment to transparency; we want investors to see that we’re carefully stewarding their capital through sustained, substantive engagement.
Why They Matter
We believe sustainability-linked loans give Blackstone a competitive advantage. Borrowers – whether it’s companies seeking to finance growth projects or private equity firms looking to finance an acquisition – know we can provide support at all phases of the sustainability journey, from identifying sustainability goals to expediting progress on pre-existing targets.
They also benefit from the Blackstone flywheel effect, where we can apply the capabilities of one portfolio company to the needs of another as appropriate.
Blackstone believes SLLs will play a key role in helping companies transition their energy sources in alignment with the broader global energy transition. SLLs enable investors to make tailored interventions without taking a control position – an attractive feature for investors keen to help their portfolio progress on environmental and decarbonization initiatives without assuming full operational responsibility for the companies they back.
Credit more broadly also has an important part to play in the global effort to decarbonize. Credit offers large-scale, flexible capital at a low cost – a huge advantage as nations and municipalities seek to transition major infrastructure or transportation networks from fossil fuels to renewables, for example. We’ve built a Sustainable Resources Platform here at Blackstone Credit focused on this worldwide effort and see an opportunity to invest $100 billion in energy transition and climate change solutions across all our businesses over the next ten years. We’re confident that this platform, combined with tools like SLLs, will help us facilitate enduring transformation at our partner companies and create lasting value for our investors.
Legal Disclaimer
This piece is for informational purposes only and is not, and may not, be relied on in any manner as legal, tax, investment, accounting or other advice or as an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any trading strategy with any Blackstone fund, account or other investment vehicle (each a “Fund”), nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or investment decision. If such offer is made, it will only be made by means of an offering memorandum (collectively with additional offering documents, the “Offering Documents”), which would contain material information (including certain risks of investing in such Fund) not contained in the Materials and which would supersede and qualify in its entirety the information set forth in the Materials. Any decision to invest in a Fund should be made after reviewing the Offering Documents of such Fund, conducting such investigations as the investor deems necessary and consulting the investor’s own legal, accounting and tax advisers to make an independent determination of the suitability and consequences of an investment in such Fund. In the event that the descriptions or terms described herein are inconsistent with or contrary to the descriptions in or terms of the Offering Documents, the Offering Documents shall control. None of Blackstone, its funds, nor any of their affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of a Fund or any other entity, transaction, or investment.
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