At $2.3 billion, it’s the largest-ever sustainability-linked loan for a commodity trader. With 21 banks on board and ambitious sustainability targets, a unique financial arrangement is helping COFCO International take the lead in sustainable commodity trading.
When COFCO International signed onto a landmark three-year sustainability-linked loan last summer, it signalled the alignment of finance, business operations and sustainability at a remarkable scale.
As a Sustainability Coordinator, Rabobank helped the trading firm set annual performance targets including overall ESG (environmental, social, and corporate governance) improvements and – uniquely – traceability of key agricultural commodities. COFCO International will receive a discounted interest rate for targets met.
Since July 2019, the loan has garnered industry awards and admiration, most recently collecting the TXF “Overall Commodity Finance Deal of the Year Award” in May 2020. How was this prize-winning loan achieved, and nearly one year on, what has it meant for COFCO International’s sustainability efforts?
“A big win for sustainability”
Despite growing popularity, sustainability-linked loans, or SLLs, are a relatively new financial construction, having arrived on the scene in 2017. What makes SLLs unique is their flexible interest rates, which are linked to sustainability targets, or Key Performance Indicators (KPIs). If the borrower meets annual targets, they pay a reduced interest rate.
SLLs are moving the needle on sustainability, says Maarten Biermans, Head of Sustainable Markets at Rabobank. And COFCO International’s “huge” loan marks a significant achievement. “This is about helping companies embed sustainability in the heart of their operations. If each year a treasury team has to ask, ‘how well are we performing on the ESG rating?’ ‘How well are we doing in commodity traceability?’ – that’s already a big win for sustainability.”
COFCO International was due for refinancing in 2019 when banking partners suggested a sustainability-linked loan for the company’s core revolving credit facility. Paul van Spaendonk, Head of Financing at COFCO International, recalls early interest. “Sustainability-linked loans were relatively new in the market space, but we could easily see the match between our internal sustainability initiatives and this type of financing.”
“We wanted to do this not as a niche side product but in our core facility,” Van Spaendonk continues. The company was already improving its sustainability practices. The banks, he says, could formalize its goals and set a timeline. “There are now concrete KPIs and targets, set together with coordinators. Our intrinsic sustainability motivations are backed by external commitments.”
COFCO International engaged a global consortium of 21 banks on the loan. As a Sustainability Coordinator, Rabobank worked with the company and other banks to set ambitious, externally verifiable targets.
“The banks gave us tremendous clarity and recommendations to reach our final KPIs,” says Wei Peng, COFCO International’s Head of Sustainability. She remembers the debate: “Do we aim for comprehensive improvement of sustainability practices overall? Or do we handpick specific indicators that we mutually agree are most important?” In the end, they decided to do both. “To show that we are truly committed.”
They agreed to year-on-year environmental, social and corporate governance performance improvement, benchmarked by ESG rating-provider Sustainalytics. They also set targets for increasing agri-commodity traceability, with Brazilian soy in the spotlight, assessed by an independent inspector annually.
The company made a further commitment as well: to reinvest interest savings back into sustainability projects. Peng: “We’re steering that money towards improving our practices.”
Traceability: “a business essential”
“As a trading firm, the biggest impact we have is in our supply chains,” Peng explains. But following commodities back to their origins is no simple task. Setting well-defined traceability targets was an industry first, but a natural choice for COFCO International. “We were ready to step up our traceability and overall supply chain management. So we thought, let’s formalize these commitments.”
Consumers and food manufacturers increasingly want to know that their purchases are not linked to deforestation or human rights violations. Deforestation in Brazil – where much of the world’s soy is grown – is a particularly hot topic. But for COFCO International, says Peng, knowing where your supply comes from is also “a business essential. It’s not a reputational exercise or something that’s just nice to do.”
The company charts the impact of deforestation on commodity yields. In one study, they observed temperature and rainfall patterns in the Cerrado, Brazil’s vulnerable savannah region where most soy is grown. Over the past 40 years, temperatures have risen while rainfall patterns have become more irregular. It’s a trend that could impact the region’s harvests. “We want to be around for a long time,” Peng explains. “When we put a new crushing facility somewhere, we need to know: in 30 years’ time, will there still be soy for our crushing plants to crush?”
A successful first year
As COFCO International approaches the end of its first year working toward new sustainability targets, the results are in. They recently completed their 2019 external audit on commodities, achieving their Year One targets under the loan as well as 100 percent traceability for directly sourced soy in 25 priority municipalities in Brazil’s Cerrado biome. Eventually they want to have full traceability for all directly sourced soy in Brazil, something Peng believes COFCO International could achieve within the next three years.
The company also hit their Sustainalytics rating target for overall social and environmental improvement. “We are very pleased and proud to see that our hard work in the past year has paid off,” says Peng. In 2019 the company strengthened its environmental policy and set a new five-year target to improve water use efficiency&. They also partnered with an international NGO to conduct human rights impact assessments on operations and commodity supply chains.
How has their loan influenced COFCO International’s sustainability initiatives? “These initiatives were already in the pipeline,” Peng affirms. “But we’re now working against a tight deadline, making rapid progress. The loan has been extra gasoline to engine.
“Traceability is not the end goal”
Despite moving ever closer to their formalized targets, COFCO International is just getting started. “Traceability is not the end goal,” Peng asserts. Next up: conducting environmental and social analyses of supplying farms. By creating regional risk profiles, the company “can focus on hot spots we identify down to the farm level.” The trader will soon launch an initiative applying its supplier screening methodology in the Cerrado’s vulnerable Matopiba region.
Van Spaendonk concurs: “First, we’re focusing on this facility and targets, but once we demonstrate it works, then we can see what more can we do. We’re identifying opportunities, together with our banks, to help farmers gain access to finance and move to more sustainable agricultural practices.”
COFCO International’s successes are also wins for Rabobank, which has its own social and environmental goals, particularly around helping producers grow food more sustainably. Maarten Biermans: “Being one of the largest food and agri banks in the world, working together with one of the largest players in the agricultural commodities sector – this is all about growing a better world together. COFCO with their operations, Rabobank with our finance and know-how.”