Sustainability

11 May 2021

Sustainable in every respect, including financing

The REWE Group has opted for its first line of credit with a focus on sustainability. Klaus Wirbel, Head of Finance at the REWE Group, and Melanie Asghar, Head of Creditor Relations, explain the reasons behind this decision.

Sustainability has long been a top priority for the REWE Group in its products and services. We have now extended this commitment to the financial sector, and we are one of the first companies in the industry to agree on a line of credit with a focus on ecological and social criteria. Here is how it works.

Products and services can contribute to a climate-neutral and socially equitable world, and financing can do so as well. The idea of sustainable finance is increasingly gaining ground. More and more investors are valuing not only the returns on their investment decisions, but also the impact their investments make as well. Politicians are also supporting the financial sector in the activities that are necessary for the achievement of the United Nations Sustainable Development Goals.

“Sustainable finance makes an important contribution to strengthening Germany’s competitiveness,” as the German government’s Sustainable Finance Committee emphasizes. The committee, which consists of representatives from the financial and real economy, civil society, and science, advises policymakers and develops proposals on how indicators from the fields of environment, social affairs and governance can be more strongly incorporated into the risk and opportunity management of investors. Klaus Wirbel, Head of Finance at the REWE Group, is the REWE Group’s representative on this committee.

To date, there are few legally binding regulations, and the linguistic distinctions between terms such as green, social, sustainable, ESG (Environmental Social Governance) compliant and impact are not always clear-cut. In summer 2020, however, the EU defined important terminology for the first time in its Taxonomy Regulation. This creates transparency and prevents financial market players from greenwashing – that is, falsely advertising actions as green or sustainable.

Different ways to make green investments

The most popular sustainable financing instruments are green bonds and ESG-linked loans. The proceeds from green bonds may only be used for sustainable projects. Accordingly, issuers must inform their investors how they have used the funds. In most cases, a specialised sustainability agency checks whether the companies have complied with prescribed market standards when issuing the bonds.

Green bonds are often used by renewable energy companies to finance specific sustainable projects, such as wind farms. In the case of ESG-linked loans, however, the intended use of the funds is not specified, and the money can be used for general business purposes, although the terms of the loan are linked to the achievement of certain sustainability targets. If the targets are met, the financing costs decrease; if they are missed, the costs rise. The respective sustainability targets are decided on by the companies together with the banks. These might include, for example, an agreement on CO2 emissions levels or a specific proportion of recycled waste. Instead of setting their own performance indicators, companies can also be advised by a sustainability agency (ESG rating).

First line of credit focused on sustainability

In spring 2021, the REWE Group arranged its first line of credit with a focus on sustainability. This is being used to refinance the syndicated credit line amounting to €1 billion from 2020. Specifically, a line with a volume of €750 million with a term of 18 months was agreed, which is based on the ESG rating of rating agency ISS. This subsidiary of Deutsche Börse AG rates the REWE Group as C+, earning its Prime status. The ISS report states that “sustainable products and services are at the heart of REWE’s sustainability strategy, and the company recognises its responsibility to promote sustainable consumption.”

“We are proud of this development for two reasons. This is the first time that we have linked a line of credit to sustainability factors, including working standards and working conditions, a strategy to minimize environmental impact, product life cycles, climate protection, socially and environmentally friendly products, and the transparency of customer information. Additionally, we have achieved Prime status in the ESG rating in our first attempt, making us one of the leading companies in our sector. This success is an endorsement of our long-standing commitment to greater sustainability,” says Christian Mielsch, CFO of the REWE Group.

“Sustainable financing is a trend. We’ve been there from the very beginning.”

Klaus Wirbel, Head of Finance at the REWE Group, and Melanie Asghar, Head of Creditor Relations, explain why the REWE Group has opted for its first line of credit with a focus on sustainability.

Melanie Asghar and Klaus Wirbel

(from left) Klaus Wirbel, Head of Finance at the REWE Group, and Melanie Asghar, Head of Creditor Relations.

The REWE Group is one of the first companies in the retail sector to also focus on sustainability in the area of financing. How did this come about?

Klaus Wirbel: Arranging this line of credit is the logical continuation of our sustainability strategy. Previously, the focus was on our product ranges. Now, we are broadening our perspective by also incorporating environmental and social criteria in our financing. Green finance is a topic that will become significantly more important in the years to come. And we at the REWE Group are on board at a very early stage.

Why are banks and investors increasingly interested in more than just healthy returns, and now also in the ecological and social impact of a commitment?

Klaus Wirbel: This is primarily down to two mutually reinforcing developments: First, the change in awareness about climate change and that the environment is threatened, and second, the increasingly stricter regulations relating to sustainable investments. Financing is an important lever for promoting sustainable ideas, and this is becoming increasingly clear to the various stakeholders. As a member of the German government’s Sustainable Finance Committee, I have been involved in developing proposals for legal guidelines. For us at the REWE Group, green finance was the next logical step, given that we are already very active in the area of sustainability.

Melanie Asghar: We quickly realised that the banks were very amenable to the idea. The credit institutions with which we regularly cooperate were all interested in cooperating with us here as well. Incidentally, the first to knock on our door were our international banks. Many of them had set specific goals for improving sustainability in their loan portfolios. When they looked at our sustainability activities, they immediately saw that we have a lot to offer in this regard.

The financial sector provides better terms to companies with proven sustainability credentials. Was that also an argument?

Klaus Wirbel: No, with regard to lending terms, we are not enjoying any noteworthy benefits through our focus on sustainability. On the contrary, the whole procedure, including the rating, at first only meant additional effort for us. Nevertheless, we have remained committed to the idea, out of a conviction that we are doing the right thing. This issue will only become more important. Those who fail to pursue a sustainable approach may eventually face refinancing difficulties. Or in other words, those seeking credit who have strong sustainability credentials won’t have difficulty finding financing partners.

The REWE Group is a pioneer in green finance in the German retail food sector. In other European countries, others are even further ahead.

Melanie Asghar: Yes, Ahold Delhaize in the Netherlands, for example, has issued a bond and agreed a line of credit with terms linked to some very specific retail targets – such as the turnover share of healthy private label products and reducing food waste and CO2 emissions. If these targets are met, the costs of the financing will be reduced. If they are not met, the costs will increase.

Was such a model out of the question for the REWE Group?

Klaus Wirbel: No. But such agreements only make sense for longer terms. In our case, the term is only 18 months. In addition, it is a backup credit line rather than a drawn credit facility. An ESG rating made more sense for us.

What’s next for green finance at the REWE Group? Will there be a green bond in the near future?

Klaus Wirbel: The line of credit with a focus on sustainability was the first step in a longer-term strategy. The REWE Group is expanding and will always need financing. And in this case, we will continue to follow our path to sustainable financing, perhaps also with the issuance of a sustainable bond.

Dr. Klaus Wirbel
About:
Dr Klaus Wirbel
Head of Finance and Group Treasury at the REWE Group
Melanie Asghar
About:
Melanie Asghar
Head of Creditor Relations

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