Iberdrola’s recent €2.5bn sustainability-linked loan that is aimed at reducing the firm’s global water footprint is one of the first to focus on adaptation as companies adjust to a changing climate.
Water scarcity is climbing the agenda in a summer of record temperatures across the globe, meaning water management and security of supply are a possible credit risk for companies that needs to be addressed.
"The way that companies manage water has not yet been tackled up to now in sustainable finance products,” said Jorge Gonzalez Jacob, global head of corporate loans at BBVA. The Spanish lender was agent bank and sustainability coordinator on the financing, which was provided by a group of 24 international banks.
"There are many industries with a large water footprint where water is essential for production, which is why we think that it makes sense for those companies to have a KPI facility focused on water," he said.
Adaptation is expected to become an increasingly big theme for SLLs as the structure can tackle a wide range of topics, including biodiversity and other natural capital themes.
"We've talked to a few issuers about adaptation KPIs and I think the sky's the limit – there are so many things that we can be measuring a company on. I really think that we should be maximising innovation right now in this market," said Anjuli Pandit, head of sustainable bonds for EMEA and the Americas at HSBC.
Standardised measurement
BBVA’s transaction is focusing on Iberdrola’s management of water in its industrial process. The utility, like many large companies is already monitoring and measuring its water usage for sustainability reports, but this measurement is not yet standardised.
The Spanish bank has a broader ambition to create a water footprint that mirrors companies’ carbon footprints, which consist of Scope 1, 2 and 3 direct and indirect measurements.
"The primary thing for companies to do is CO2 emissions reduction but water has been left behind. We have tried to mirror the carbon footprint with a water footprint," Gonzalez Jacob said.
"Companies are still behind in the measuring and standardisation of the water footprint which should be equivalent with CO2 emissions with Scope 1, 2 and 3 direct and indirect water consumption. I think there is still some room for improvement."
Iberdrola’s loan has two KPIs. The first aims to reduce water consumption in generation of energy by 50% by 2030. This is measured as the amount of water drawn within the organisation's boundaries and not discharged back into the environment.
The second KPI is the CDP Water score, which assesses disclosure, awareness and management of water risks, as well as best practices. CDP is a non-profit organisation that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts.
While the water footprint SLL currently focuses on a reduction KPI for water used in industrial processes, it can also use six to eight secondary KPIs for other water usage, such as the use of rainwater.
These additional KPIs can cover expected advances in the ways that companies manage water in industrial processes and others KPIs could also cover water reduction adaptation, such as the use of recycled water and more eco-friendly water products.
BBVA is pitching the water footprint SLL to other companies that make intensive use of water in their production processes, such as those operating in the energy, food and beverage, agricultural, textile and packaging sectors that may want to prioritise the issue.
"Drawing attention to water is very important, if we don't tackle it, it will be a problem in the future because it is a consequence of climate change. Many companies have production in areas where there is really high water stress, that's even more important with the way that rainfall is changing, and I think we need to be better prepared," Gonzalez Jacob said.