Save the World, Reduce Your Cost of Capital: How Danone is Turning ESG Impact into Lower Borrowing Costs
The world is changing! Over the last several years, Environmental, Social and Governance (ESG) criteria have been an emerging focus in the investing world, primarily driven by equity investors where it can be harder for a company raising funds to correlate capital costs with ESG impact. Last month, multinational food-products giant Danone Group and its bank group, led by BNP Paribas, redefined the ESG landscape with a credit facility that is said to directly link borrowing rates to “verified positive impact on the word.”
At a time when the social impact claims of global corporations are sometimes viewed with skepticism, Danone is flipping the ESG narrative around by keeping itself financially accountable to tangible incentives for sustainability. Twelve leading global banks, led by BNP Paribas, provide Danone’s $2 billion syndicated credit facility on terms that provide for lower borrowing costs if Danone increases its impact by meeting certain ESG criteria. According to Danone’s 2017 financial report, the third-party-verified metrics include increasing the percentage of consolidated sales of Danone covered by B Corp certifications, and improving Danone’s ESG scores under ratings evaluators like Sustainalytics and Vigeo Eiris. In other words, greater B Corp sales and higher ESG scores translate into cheaper capital – and a dozen major global credit providers are standing behind the innovative model. Even if the move results in only a small percentage of savings on loan rates for Danone, it could lead to several million dollars in annual savings for the company, while providing a successful structure for more financings of this type.
For those of you not familiar with B-Corp certification, it is a third-party certification of for-profit companies established by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. If you want to learn more, check out the B Corp Declaration here.
Danone’s reinforced commitment to ESG aligns squarely with what investment managers and a range of private funds have been calling for – a broader view of the mission of corporations. Even the New York lawyers are getting on board (I hope they catch up to me!): In his annual letter to corporate boards, Marty Lipton pushes boards to consider not only their stockholders, but also their “expanded stakeholders,” and explores how companies can build sustainability and social impact into their corporate governance strategy. Blackrock CEO Larry Fink recently made a more urgent call on CEOs to “start accounting for the societal impact of your companies, or risk disappointing the largest asset manager in the world.” Investors across the board are increasingly placing their assets in companies that employ a model of long-term sustainability for both themselves, and the communities and resources to which they are inextricably connected.
Now, the challenge is for CEOs, CFOs and Boards of Directors to determine how their company can keep up with the ESG wave and the new standards it places on financial performance. Replicating the B-Corp-centered track Danone and its banks established is a good place to start. While the Danone approach is revolutionary, it is not surprising, considering the household-name conglomerate was the first Fortunate 500 Company to announce its goal of becoming a Certified Benefit Corporation in 2017. And it’s well on track to reaching that goal, building a strong partnership with B Lab while guiding ten of its subsidiaries towards the successful completion of the B Impact Assessment. If companies want to remain competitive to both investors and financial partners moving forward, it’s clear that the benefit corporation mentality is no longer simply beneficial – it’s vital.