Sopra Steria, the European technology, consulting and digital services company, signed an innovative €1.1 billion credit line in April, arranged by Crédit Agricole CIB and LCL, a retail bank subsidiary of the Crédit Agricole group.
The annual margin will be indexed to a single non-financial key performance indicator (KPI) targeting a reduction in greenhouse gas (GHG) emissions across the company’s supply chain.
Many sustainability-linked loans incorporate several KPIs, often spanning social and governance as well as environmental targets.
“Sopra Steria has a very robust corporate social responsibility strategy with many social and governance components,” Nathalie Sarel, head of sustainable banking, SME and mid-cap companies at Crédit Agricole CIB, tells Euromoney. “But with this financing, it wanted in particular to highlight its strategy to reach net-zero carbon emissions by 2028 and its SBTi-approved long-term decarbonization commitments.
“It has set ambitious intermediate targets to reduce scope 1, 2 and 3 emissions per employee over the lifetime of the financing.”
Financial institutions are critical players in driving real-economy emissions reductions through investments and lending activities
The Science Based Targets initiative (SBTi), the global body enabling businesses to set emissions-reduction targets in line with climate science, published its Net-Zero Foundations for Financial Institutions paper in April. This provides new concepts for defining and setting net-zero targets for banks, asset owners, asset managers and other financial institutions.
Luiz Fernando do Amaral, chief executive officer of SBTi, stated: “Financial institutions are critical players in driving real-economy emissions reductions through investments and lending activities. There are signs the sector is embracing this responsibility. Immediate action is already possible for short term science-based targets. However, when it comes to net-zero, there is little understanding of what it means for the finance industry.”
The paper seeks to provide the clarity that has been desperately needed to develop a net-zero standard for banks and other financial institutions that will tie net-zero pledges to science-based action.
Scope 1 and 2 emissions are within a borrower’s own control, covering GHGs from a company’s own operations and premises, as well as from its suppliers of power.
For a digital services company, cutting these direct emissions typically requires buying electricity from a power company that sources renewable energy and improving the efficiency of its buildings.
Scope 3 emissions, coming from suppliers and customers, are harder to control and require a company to engage up and down its supply chain.
Cloud issues
Many companies see moving to the cloud as the obvious path to green IT, and a way of reducing the carbon footprint of manufacturing and later disposing of their own hardware including servers. But cloud providers’ own hyperscale data centres use a lot of power that needs always to be on.
Solely rating suppliers in the value chain to identify the largest emitters of greenhouse gas and exclude them may not lead to the optimal outcome
Sopra Steria refers specifically to emissions from such off-site data centres as well as from providers of business travel.
“Sopra Steria has joined many initiatives in the green IT field,” says Sarel. “Reducing emissions requires a lot of engagement from companies with suppliers and customers, and maybe rating them on ESG [environmental, social and governance] criteria and calculating their ex-ante carbon footprints.”
Some companies, especially smaller ones, may struggle to supply the needed data. However, the French state ecological transition agency ADEME provides emission factors for carbon accounting across industry sectors.
It is still a tricky business. Banks have long argued that their own biggest impact will come not from shutting off credit to brown companies and financing only green ones, but rather from working with polluting companies – including first through loan pricing and eventually loan availability – to encourage their transition to sustainability.
Companies such as Sopra Steria have been at the forefront of the sustainability movement for more than a decade.
“Solely rating suppliers in the value chain to identify the largest emitters of greenhouse gas and exclude them may not lead to the optimal outcome,” Sarel says. “Companies should also engage with their suppliers, and accompany them and also their clients on the journey to a low-carbon economy.”
Incentives
Banks remain vital suppliers of credit and other key financial services, including payments, to many small and medium-sized enterprises (SMEs). Fearful of coming regulation and the rising balance-sheet cost of holding stranded assets, lenders are incorporating sustainability measures and transition risk assessments into their credit underwriting and into loan pricing.
Most sustainability-linked loans operate on a bonus and malus system of incentives. If borrowers meet their targets, the loan margin is reduced by a set number of basis points. If they fail to meet them, the margin payable to lenders may increase by a similar amount.
This innovative transaction strengthens our sustainable development strategy consistent with our vision and our values
An innovative aspect of this credit line is that if Sopra Steria achieves its targets, then instead of banking the savings from a lower loan margin, it will rather invest them in financing high-impact digital projects contributing to the first two objectives of the European taxonomy on mitigating and adapting to climate change.
The projects will be chosen based on several eligibility criteria set by a selection committee of experts. Sopra Steria will report to lenders each year on its allocations to these projects and on their impact.
One being considered is a proposal on sustainable agriculture from a leading engineering school to use digital technology and artificial intelligence (AI) to improve efficiency in the watering and feeding of crops.
Cyril Malargé, chief executive officer of Sopra Steria, stated on completion of the financing: “This innovative transaction strengthens our sustainable development strategy consistent with our vision and our values. It demonstrates the Sopra Steria Group’s ability to prepare for and integrate our major collective environmental and societal challenges.”
Even if Sopra Steria fails to reach is GHG reduction targets and so cannot deliver savings on the loan margin, the selected projects will still be financed. Sarel explains: “The bank lenders have agreed that, just as Sopra Steria would finance projects from savings on the loan, so lenders will devote any higher margin received on the malus side to financing those same impactful digital projects.”
All of Sopra Steria’s main, long-standing banking partners agreed to the terms of the credit line and the framework for allocating to and reporting on projects to be financed.
The credit was oversubscribed.
