Sustainability-linked loans and the data centre
Thu 13 Jan 2022
As data centres become more committed to sustainability and reducing environmental impact, will sustainability-linked loans be the financial future of the industry?
Sustainability-linked loans are financial allotments that are tied to the achievement of sustainability goals by the company. Sustainability-linked loans are different from green loans, because green loans are tied to the asset. A green loan for a data centre would be used to finance the construction of a green facility – for example, an LEED-certified data centre. A sustainability-linked loan, on the other hand, is used to fund operations that are focused on the achievement of sustainability performance targets (SPTs).linked
According to the Loan Syndication and Training Association (LSTA), “Sustainability linked loans aim to facilitate and support environmentally and socially sustainable economic activity and growth. “ Traditionally, loans were granted on the basis of financial considerations, such as cash flow and operating expenses, which impact the projected ability to repay.
But sustainability-linked loans are tied to non-financial performance indicators.
With sustainability-linked loans (SLLs), interest rates are variable and can be lowered over time, as a borrower demonstrates its achievement of predetermined, agreed-upon sustainability goals. This makes progress toward sustainability doubly important: both for reducing the impact of business on the environment; and providing a direct financial incentive.
SLLs are becoming more prevalent globally, growing in popularity: the total new debt tied to sustainability-linked loans was more than $800 billion USD in the first half of 2021 alone. In six months, the sustainability loan total for 2021 surpassed the amount granted in the entire year of 2020.
What is driving this growth?
Sustainability-linked loans are bolstered by government policy, which has incorporated SSLs into ESG (environmental, social, and government) initiatives, making these loans an attractive option for both lenders and borrowers. For example, the European Commission is investigating how financial considerations can be applied to support the EU Green Deal, one objective of which is to help channel private finance to support public sustainability goals. The EU created a taxonomy to classify sustainability initiatives, and is working toward finalizing a Green Bond standard that would cover sustainability-linked loans.
This may be one of the reasons that the EU leads the world in sustainability-linked debt, with 63% of global sustainability-linked loans originating in Europe – particularly in France.
The EU’s Loan Management Association (LMA) has taken the lead in defining sustainability-linked loan principles (SLLPs). These include specific KPIs that can be used as measures of performance success and characteristics of SLLs, as well as guidance on reporting and verification of borrower performance.
What does this mean for the data centre?
Many leading data centre companies have already published sustainability goals, and voluntarily report on their progress on an annual basis. However, a lack of standardisation makes these voluntarily published reports difficult to compare, and data difficult to verify.
Recently, Schneider Electric published a white paper in which they outline 23 standardised metrics for data center sustainability initiatives. If this gains traction, companies will begin to report across the same KPIs, measured in a similar manner, so that performance can be compared and verified.
If these sustainability KPIs reflect the SLLPs set forth by regulatory bodies, it will make the loan application and KPI verification process a part of the data centre sustainability ecosystem. For example, a data centre owner/operator can factor in the language and measurement of KPIs when designing sustainability goals for their facilities, to ensure that their own goals match the reporting and verification requirements for SLLs. Data collection and analysis then feeds different goals – both company sustainability measures and loan reporting and verification.
Moreover, verified sustainability indicators demonstrate that a data centre is aligned with customer environmental priorities, potentially providing a competitive advantage for providers.
Some leading data centre companies are already taking advantage of the opportunity to obtain flexible financing through sustainability-linked loans. AirTrunk recently converted $1.54 billion USD in traditional financing to an SLL, establishing KPIs across three key areas, “diversity and inclusion, carbon neutrality, and energy efficiency.”
Aligned also made a deal for $1.75 billion USD in sustainable financing to grow their business, constructed of $1.35 billion in securitized notes which are considered sustainable loans, and $375 million in a new SLL. The company intends to use the funds to buy land for the construction of new facilities in the U.S. and internationally, and expanding capacity at existing facilities.