Dutch bank ING has closed Chinese technology provider Ant Group’s first sustainability-linked derivative (SLD), a US$400 million transaction that is an interest rate swap designed to hedge the interest rate risk of drawings under a floating rate credit facility with sustainability features.
The deal’s ING-designed sustainability structure incorporates a two-way incentive mechanism linked to Ant’s sustainability performance, with key performance indicators (KPIs) that address major environmental and social goals set out in the company’s environmental, social and governance (ESG) strategy.
These KPIs are highly relevant and material to the company’s operations, the bank notes, and are “unique and innovative in nature, reflecting Ant’s DNA in technology”. To reach its environmental KPI, the company’s intends to actively apply green computing algorithms to improve server efficiency in its leased data centres and reduce Scope 3 emissions.
Additionally, social impact KPIs are included to leverage upon the network effect of the company’s sizable Alipay user base and ecosystem to encourage more green actions from communities and industries.
When the company achieves these targets – verified by a reputable and independent party – it is entitled to a rebate from the bank. Conversely, if none of these targets are met, the company will need to payback a pre-agreed amount to the bank.
Interest rate swaps are forward contracts where one stream of future interest payments is exchanged for another, based on a specified principal amount. The aim of these swaps is to reduce or increase exposure to fluctuations in interest rates.
The contract entered into protects the company against potential higher interest rate fixings in 2023, the bank points out. If it meets its sustainability targets, it will effectively enjoy reduced interest expense on bank debt.
Despite the general slowdown in 2022 globally, China and Hong Kong maintained the growth momentum in sustainable finance issuance and reached US$173 billion last year, a 34% on-year increase, according to data from Bloomberg NEF.
“This is a trend reflected in ING’s Greater China franchise,” ING says, “where the number of sustainable finance deals closed last year increased by a third, and the amount of sustainable finance mobilized more than doubled in the same period.”