Almost all members of this one-basis-point club are real estate investment trusts, or vehicles that own large property portfolios and distribute most of the income they generate as dividends. Among them are multibillion-dollar companies such as Simon Property Group Inc., one of the largest shopping mall landlords in the U.S., and Welltower Inc., one of the biggest owners of senior living facilities.
Many REITs are likely choosing such provisions simply because it’s what their peers have done, said Nathan Cooper, a partner at Hogan Lovells who helps arrange sustainability-linked loans.
“It’s a formula that is already out there and vetted by the banks and doesn’t pose any downside risk to the REIT,” Cooper said via email. “You are seeing now companies and banks being a little more conservative with the pricing adjustments and being wary of the downside pricing risk on a new concept.”
Simon Property Group didn’t respond to requests seeking comment, while a representative for Welltower declined to comment.
While the financial impact may not be meaningful for companies, there is a reputational risk if goals aren’t met, according to Arthur Krebbers, head of sustainable finance at NatWest Markets in London.
“It's too narrow to view those loans purely through a direct pricing-incentive lens,” Krebbers said. “What they're much more concerned about is the wider reputation and market impact if they have to reveal they didn't meet a core sustainability target they set out.”
Bankers’ Dilemma
For lenders including Bank of America Corp., JPMorgan Chase & Co. and BNP Paribas SA, the three largest global underwriters in the market, getting companies on board is a delicate balancing act.
Some bankers who work in ESG financing said that while their institutions want to encourage clients to become better corporate citizens, there is only so much of their bottom line they are willing to sacrifice. Credit lines are often money-losing products banks offer to companies in order to cement relationships and attract more lucrative business down the line.
But therein lies a fundamental dilemma, observers say.
Banks are reluctant to provide too big of a discount to borrowers that meet targets out of concern the loans will become overly burdensome. If penalties are too steep, on the other hand, they risk pushing customers away.