Unlocking sustainable growth: Role of sustainability-linked loans in Nigeria

Introduction

Nigeria has a unique opportunity to benefit from using Sustainability Linked Loans (SLLs). Unlike green loans, SLLs offer the flexibility to use the funds for general business purposes while promoting sustainable practices and supporting economic activity. This approach can help Nigeria meet its goals and achieve a thriving, sustainable future.

Furthermore, adopting NDCs and LT-LEDS to transition to a low-carbon economy can further support Nigeria’s commitment to achieving net-zero emissions by 2050. By implementing SLLs and sustainable practices, Nigeria can lead the way to a brighter and more prosperous future for its citizens and the world.

This is especially imperative today because Nigeria faces a complex economic situation as a populous African nation. The country faces many challenges that could hinder its economic transformation agenda. The current issues in Nigeria can be attributed to resource inefficiency, budgetary constraints, and macroeconomic challenges/reforms. Historically, Nigeria has inefficiently allocated resources, including subsidies for petrol, electricity, and foreign exchange (resource inefficiency).

Unaccounted-for subsidies make budget tracking and scrutiny challenging (budget constraints), and macroeconomic reforms are vital to improving development outcomes but beset with different hindrances.

To address these resource inefficiencies, fiscal constraints, and other challenges, Sustainability-linked loans (SLLs) can play a crucial role in Nigeria’s economic landscape, which is plagued with many challenges.

What are sustainability-linked loans (SLLs)? How can the government and Businesses benefit from SLLs? The Series of articles under Unlocking Sustainable Growth: The Role of Sustainability-Linked Loans in Nigeria aims to shed light on the potential of Sustainability-Linked Loans (SLLs). They are designed to inspire a collective effort toward a more sustainable and resilient Nigeria in light of the mounting challenges of raising and accessing sustainable finance.

What is Sustainability-Linked Loans (SLLs)?

SLLs are financial instruments where the terms are tied to the borrower’s sustainability performance. They encourage companies to achieve sustainability goals by linking loan terms (interest rates, fees, etc.) to specific ESG (Environmental, Social, Governance) targets.

Differences Between Green Loans and SLLs

Unlike green loans, SLLs do not require proceeds to be used for specific green projects; they are often structured as revolving credit facilities for general corporate purposes. The variation in the loan’s financial terms (such as interest rates) depends on whether the selected KPIs reach the predefined sustainability targets (SPTs).

The Financial Conduct Authority (FCA) does not directly regulate this market. However, it emphasises the importance of ensuring market integrity and transparency in sustainable finance.

Key Components of SLLs:

The following are the key components of SLLs:

1. Selecting KPIs (Key Performance Indicators). This involves choosing material KPIs that align with a nation’s core sustainability and business strategy. It also addresses relevant challenges such as reducing greenhouse gas emissions, improving water quality, enhancing workplace safety, and promoting diversity.
2. Calibration of SPTs (Sustainability Performance Targets): This includes defining ambitious and meaningful SPTs that countries commit to achieving within a predefined timeline. It evidences the level of ambition the borrower commits to.
3. Loan Characteristics: This involves Structuring the loan based on sustainability outcomes. The International Capital Markets Association (ICMA) and Loan Markets Association (LMA) guidelines can be leveraged for SLLs.
4. Reporting and Verification: this includes regularly monitoring and reporting progress. External Verification to ensure transparency and credibility gives it the integrity that it deserves

Benefits of embracing SLL:

There are several benefits associated with SLL, such as the following:

• Alignment with SDGs: SLLs promote sustainable practices aligned with the UN’s Sustainable Development Goals (SDGs).
• Incentivizing Positive Impact: Borrowers are incentivized to improve their ESG performance.
• Risk Mitigation: Lenders assess sustainability risks and reward positive impact.
• Transparency: Reporting requirements ensure accountability.

Why Nigeria Should Embrace SLL

As Nigeria journeys through its sustainability path, it can embrace SLLs in sectors listed in its Nationally Determined Contributions and the Long-Term Low Emission Development Strategies to overcome the difficult economic Landscape. Specific locations, such as ports, airports, farms, etc, can benefit from SLLs. Embracing sustainability-linked financing would help align the nation with global goals and foster transparency.

The following further demonstrate why Nigeria (government and businesses) should embrace Sustainability-Linked Loans:

1.   Greening Sources of Finance:
   • All sources of finance in Nigeria, including borrowings and investments, may soon be required to respect and reflect sustainability principles.
   • The Central Bank of Nigeria expects most large Agriculture, power, and oil and gas projects to meet certain requirements.

2.   Public Finance Reform:

• Nigeria must address inefficiencies in its public finances to promote inclusive and sustainable development.
• Inefficient and regressive subsidies were historically allocated to petrol, electricity, and foreign exchange. Addressing these issues will promote a more sustainable economic future.

3.   Business Benefits:

• Today, Corporations that voluntarily adopt sustainability policies tend to have better organisational processes and outperform companies that adopt fewer policies, making sustainability practices beneficial to businesses.
• By integrating sustainability principles into financial decisions, businesses can enhance their long-term viability and competitiveness.

4.   Environmental Impact:

• Sustainability-linked loans are crucial in driving positive environmental outcomes. Green mortgages should be introduced in Nigeria to ensure homes have fewer environmental issues and reduce risk for financial institutions.

Conclusion

Embracing sustainability-linked loans is crucial for Nigeria’s economic growth, environmental well-being, and long-term prosperity. To make this happen, Nigeria can leverage SLLs to fund sustainable projects (Sustainable finance). It is essential to continually encourage businesses and investors to consider ESG factors in decision-making (ESG Integration) and link loan terms to specific SDGs, promoting positive impact SDG Alignment. A clear reporting mechanism should also be in place to track sustainability progress (Transparency and Reporting).

Stay tuned and discover the latest insights on Sustainability Linked Loans (SLLs) through a captivating article series. Gain valuable knowledge and expertise in the field by reading these articles and stay ahead of the curve in the sustainable finance industry. Don’t miss out on this opportunity to learn from a respected leader and join the movement towards a more sustainable future. Check out the article series today!

The next articles will provide examples of how to implement successful SLLs.

An article Series on Sustainability Linked Loans (SLLs) written by Eugene O. Itua, Ph.D., CEO of Natural Eco Capital and SDG Impact Standard Accredited Trainer, eugeneitua@gmail.com