India's largest and the world's fifth-largest agrochemical firm United Phosphorus Limited (UPL), is raising $500 million in debt financing, becoming the first Indian company to take such sustainability-linked loans. The firm has mandated Mitsubishi UFJ Financial Group (MUFG) and Rabo bank to raise a $500 million five-year plan.
The sustainability-linked borrowings offer access to lower-cost ethical funding.
According to the Bloomberg report, the company is looking for a loan to refinance existing higher-cost debt. The deal will help UPL reduce the cost of borrowing and engage with new investors.
A sustainability-linked loan is described as a loan, where apart from the standard financial criteria, there are sustainability targets. These loans are used to incentivise borrowers commitment to sustainability and to support environmentally and socially sustainable economic activity and growth.
When the company achieves the sustainability target they had set or agreed upon, the interest rates that the company needs to pay goes down. But if the company is unable to achieve the target, the interest rates might go up.
With each year passing by, the physical effects of climate change are also increasing, along with the growing population and dying natural habitat. It becomes all the more important to bring about certain changes in the food system. Sustainability-linked loans have become an increasingly important part of the solution that enables banking institutions to use their financial resources to help get sustainability outcomes.
Sustainability-linked loans captured the market in recent years. According to the data compiled by Bloomberg, in 2021 alone, several companies have borrowed $24.4 billion via such loans, nearly 50 per cent more than what was in 2020.
Last year in 2020, Swedish oat milk brand, Oatly, became the world's first plant-based company to enter into a sustainability-linked loan agreement. As consumers, businesses and governments focus on responsible investment, sustainability-linked loans have become an essential part of the process.