Can finance contribute to the emergence of more sustainable development patterns and make businesses more ethical? AFD believes this is possible - and is working in that direction. In fact, we’ve been working for many years to create a new sustainable finance model to help financial systems play a key role in economic, social, and environmental transitions.
New and more ambitious approaches can still be developed, allowing us to go even further, to enable financial systems to contribute to achieving the SDGs. This is why Agence Française de Développement is developing ESG-linked loans, whose interest rate is adjusted in relation to the borrowers’ non-financial objectives - namely their environmental, social, and governance (ESG) practices. In concrete terms, the loan pricing can be revised downward during its repayment period, if the borrowers exceed the targets.
Loan repayment periods of 10 to 15 years
The objectives to be achieved and the procedures for verifying progress are determined at the negotiation phase of the loan. The loan period may be 10 to 15 years. For a 10-year current loan, for example, an initial impact assessment carried out after 3 years will – if the results are positive – make it possible to reduce interest rates over the remaining 7 years.
A pilot project was launched in November 2019, in the form of an initial loan with a potential margin step-down. This was a credit line of €85 million granted by AFD to the Industrial Development Bank of Turkey (TSKB), to enable it to finance companies working toward gender equality (in careers and wages) and higher rates of female employment. AFD had already granted TSKB a loan in 2016, which the bank went on to loan to businesses working towards gender equality. But that was before AFD had developed this new approach, which rewards sustainable policies and practices.
Finance as a lever for transformation
By offering impact loans, AFD encourages its public bank partners to make even greater strides in generating impact and in measuring the effects of projects over time, whether in terms of their in-house practices or in the evolution of their clients’ practices.
This approach also incites banks to improve the impact monitoring of the investments they finance thanks to AFD resources, by developing multi-sectoral analysis methods. For example, they may focus not only on the environmental impact sought after, but also on the company’s gender-equality practices.
Indeed, AFD’s public bank partners will be urged to transform their own practices, both internally (to adopt climate strategies and strengthen gender equality, for example) and in their credit policy (to develop new dedicated products and introduce new project selection criteria). In this way, the scope of AFD projects can be extended to the entire loan portfolio, and hence beyond the more direct impacts related to investments financed through the theme-based credit line provided by the AFD.
The TSKB experience in this new initiative has already led to positive effects: its innovative human resources policy has advanced female employment rates within the bank (55% of all employees and 51% of managers are women).
A three-pronged strategy
Adjustable credit lines are in line with AFD’s financial systems strategy, which seeks to use financial systems as a means to transform development trajectories. The strategy is focused on three areas: access to finance, consolidation of financial systems, and guidance for banks in transforming their practices. This new approach can be a powerful driver of behavioral change in financial sectors.
AFD’s Financial Systems Division has identified several public financial institution partners around the world that could adopt this new approach. These are public banks with which AFD already has a relationship of trust and that are ambitiously engaged in areas such as climate finance or, more broadly, SDG financing.