GBRW is proud to have recently participated in the development of Piraeus Bank’s sustainability-linked loans (SLLs) framework, the first of its kind in Greece. On 4th September 2024, Sustainable Fitch provided its assessment of the bank’s SLLs framework, concluding that loans financed under this framework are aligned with market best practice, as informed by relevant principles published by the London-based Loan Market Association (LMA) and its counterparts in the USA (LSTA) and the Asia Pacific region (APLMA).
Unlike “use-of-proceeds” loans, SLLs can be any type of loan where the financial terms change based on the borrower’s success in meeting predefined sustainability performance objectives. The focus of SLLs is to encourage borrowers to improve their sustainability efforts by achieving specific targets. The proceeds of the loan can then be used to finance investments, support working capital needs, or fund future development plans related to the borrower’s ongoing or planned activities.
Formulating a sustainability-linked loan is a delicate exercise. Key Performance Indicators (KPIs) are selected and Sustainability Performance Targets (SPT) set, and the achievement of these allows adjustment to the interest rate and other terms, providing an incentive to meet the predefined targets. KPI selection is based on relevance, measurability and quantifiability. The process for calibration of the SPTs is key to the structuring of SLLs. They use historical data and external benchmarks to ensure robust baselines. The SPTs should be ambitious, i.e. represent a material improvement in the respective KPIs that is beyond a “business-as-usual” trajectory. The calibration of SPTs requires significant research on the part of the bank, as well as the borrower’s input.
Designing the SLLs framework was an important initiative for Piraeus Bank, one of Greece’s largest financial institutions which provides retail and corporate banking services to around 6 million customers. As of end of Q2 2024, the bank had 7,500 employees and total assets of EUR76.6 billion. With the aim of establishing itself as the most reliable bank in Greece, Piraeus Bank is pursuing the integration of climate risks, and other environmental and social factors, into its business strategies and practices. In addition to its financial performance aspirations, Piraeus Group is consistently moving towards its goal of sustainable banking by creating the infrastructure, policies and strategies that integrate Environmental, Social and Corporate Governance (ESG) criteria into all its operations. The bank established an ESG strategy in 2020, in line with the UN Sustainable Development Goals and UN Principles for Responsible Banking, with a goal of achieving net-zero emissions by 2050. It has also set emission targets for 2030 that have been validated by the Science Based Targets initiative.
Piraeus Bank is willing to provide the innovative SLLs product to its predominantly medium-sized clients. However, as SLLs and bonds are more often deployed in the context of large corporations with dedicated sustainability departments, it was necessary to simplify and standardise the approach so that the framework could be seen as user-friendly for both loan officers and clients, while retaining the core characteristics of sustainability.
GBRW supported Piraeus Bank in the development of a questionnaire to assess the ESG-readiness of SME clients. The questionnaire consisted of 40 questions aligned with the European Sustainability Reporting Standard (ESRS) and Taxonomy, covering environmental, social and governance topics, including: pollution, water consumption, resources use and recycling, biodiversity, climate change mitigation, own staff policies, local community impact, consumers and end users, and business conduct. The questionnaire was accompanied by a narrative providing background and explanations for each of the questions and it proposed KPIs and SPTs, verification documents and references to relevant frameworks, standards and legislations. The key challenge was designing KPIs and SPTs that are both suitable for SMEs and acceptable to them, without diluting any of the ESG principles.
The framework allowed Piraeus Bank to establish a structured process to offering SLLs, aligned with its credit policy. It evaluated and ranked environmental and social risks, including climate risk factors, and excluded financing for harmful sectors. The framework was structured along five key sections: the selection of eligible corporates; identification of KPIs; calibration of sustainability performance targets (SPTs); verification; and financial incentives. This product is on track to become a flagship product for Piraeus Bank, geared towards both existing and prospective clients.