ETG’s sustainability-linked loan: a groundbreaking deal among DFIs
November 20, 2024 saw a ground-breaking deal being struck between ETG—a global conglomerate with a major focus on agricultural trading and processing in Africa—and a syndicate of development finance institutions (DFIs), with TDB and FMO at the helm. Worth USD 394 million, the agreement took the form of a sustainability-linked loan (SLL) and was one of the first of its kind—for many different reasons. Future-minded spoke to ETG’s Chief Treasury Officer and two of FMO’s senior investment officers to find out what makes this loan so special and what it means for the different parties involved.
Photo: Cocoa farmer being trained by ETG on Agroforestry, Côte d’Ivoire
SUSTAINABLE AGRICULTURE IN AFRICA
To understand the extent of ETG’s operations, it’s necessary to take a more granular look. “We work closely with smallholder farmers,” says Paul van Spaendonk, Chief Treasury Officer at ETG. “Around 40-60% of GDP in Africa comes from agriculture, so ETG is genuinely relevant to the African economy.” Through a logistical infrastructure of warehouses, processing plants, trucks, and port facilities, ETG plays a critical role in connecting farmers in Africa with consumers all over the world. And it works both ways: ETG provides farmers with access to premium markets for exporting their products, such as cocoa beans or cashew nuts; but they also supply farmers with inputs, such as fertilizer or seeds. Paul is passionate about the company’s strategy: driving net positive impact for nature, people, and business. “What’s good for the environment is good for the farmers and their communities, which in turn is good for our business. And with 40% of our funding coming from DFIs, performing strongly on environmental and social aspects is very important from a financing perspective, too.”
“What’s good for the environment is good for the farmers and their communities, which in turn is good for our business.”
COMBINING COMMERCIAL AND DEVELOPMENT FINANCE
ETG had a vision to combine its commercial banking and DFI financing into one anchor facility for the group: a sustainability-linked loan (SLL). Within this loan facility, commercial banks would provide the short-term funding and DFIs the long-term, large volumes. Led by SMBC and Rabobank and signed earlier this year, the commercial facility is for USD 125 million and has a tenor of one year with multiple extension options. The DFI facility is for USD 394 million and has a tenor of three years, with a possible extension for a further two. But from a sustainability perspective, both loan facilities have the same set of Key Performance Indicators (KPIs) which will be monitored and audited by third parties. They also have the same strong financial incentives for meeting those targets (and the same penalties for not meeting them).
Why structure the deal in this way? Guus Werners, Senior Investment Officer for FMO’s syndications, explains: “FMO co-arranged this loan with the African-based DFI Trade and Development Bank (TDB), with participation from four other DFIs: DEG (Germany), Proparco (France), FinDev (Canada), and the OPEC Fund. The DFIs act as anchor investors, offering stable, long-term financing with a proactive approach to environmental and social priorities. Without their involvement, the commercial banks would have been more cautious about investing in their tranche of the SLL. The participation of DFIs serves as a stamp of approval that everything has been thoroughly assessed and aligned from a sustainability perspective – which makes it easier for commercial players to come on board. The hope is that this DFI syndicate will attract more commercial funding in the future.”
A one-year commercial facility of
A three-years DFI facility of
“It’s a win-win-win for ETG, the DFIs, and the private investors.”
For ETG, involving DFIs in the deal was a logical choice, given their clear added value: providing access to more funding, bringing in additional investors, delivering substantial technical assistance support, and offering a longer-term loan. The latter also gives ETG a better liquidity profile and more flexibility, which was much needed by the company. Moreover, harmonizing the KPIs between the commercial lenders and the DFIs, as well as signing one agreement with multiple DFIs (rather than several individual agreements), both make the deal far more efficient – not just for ETG but for all investors involved. While linking loans to sustainability is increasingly popular among European commercial banks, this SLL is one of the first of its kind in the development finance world. “This is where the private sector and the public sector come together,” says Paul. “The agreement brings together parties from three continents – Africa, Europe, and North America – combining both private and public sectors. This loan will act as a blueprint going forward.”
Lead arrangers and lenders:
• FMO
• TDB, the Eastern and Southern African Trade & Development Bank
Lenders:
• DEG, the German development finance institution
• FinDev Canacda, the Canadian development finance institution
• Opec Fund for International Development
• Proparco, a subsidiary of Agence Française de Développement Group
Participating in FMO loan:
• FMO Investment Management, various funds
• ILX, emerging market focused private credit fund
Photo: Individualized cocoa farmer coaching, Ghana
LINKING THE LOAN TO SUSTAINABILITY KPIS
The loan is linked to sustainability via specific KPIs – which fall broadly into four categories, in line with ETG’s strategic goals:
1
ABSOLUTE SCOPE 1 AND 2 GREENHOUSE GAS EMISSIONS REDUCTION
2
DEFORESTATION-FREE SUPPLY CHAIN (WHILE PROMOTING LANDSCAPE REFORESTATION)
3
EXTENSION SERVICES TO SUPPLY CHAIN FARMERS
4
GENDER-ORIENTED SUPPORT SERVICES TO WOMEN FARMERS
In an innovative approach, the DFI tranche of the SLL also connects ETG’s positive performance on the KPIs with their progress on their environmental & social action plan (ESAP). DFIs generally uphold higher standards and requirements on environmental and social criteria than commercial parties do. Through this structure, this means that ETG is committed and incentivized to deliver on both the KPIs and the ESAP – ensuring a holistic approach to sustainability. And before embarking on this loan, in its sustainability coordination role FMO also vetted the KPIs to make sure they were robust and fit for purpose, aligning with the intended impact of the facility and the Sustainability-Linked Loan Principles.
There are targets and programs under each category, but a few stand out in particular. “People are already familiar with sustainability certifications, such as Fairtrade, on products like coffee and cocoa,” explains Paul. “But we’ve recently expanded the certification process to cashew nuts as well. Now, we export Rainforest Alliance-certified cashews, which are better for nature and fetch a higher price for the farmer.
“On a small scale, we’ve also tested out Village Savings and Loan Associations (VSLAs): community-based groups that collectively save a small portion of their incomes. These savings provide access to small loans that members can use to invest in their farms and side businesses, leading to diversified incomes and greater financial capacity. It’s been successful so we’re now rolling out the VSLA concept on a larger scale via our KPIs.”
One of the other targets of the SLL is to provide smallholder farmers with extension services to improve both the quality of their products and their livelihoods. “This support involves training on all kinds of good agricultural practices, including climate resilience, application of fertilizers, storage of harvested produce, digitization of processes, financial literacy, and so on,” explains Coen van Genderen, Senior Investment Officer in FMO’s agriculture division. “Currently, ETG is already reaching 360,000 farmers in this way, but the target is to reach one million by 2030.”
Farmers reached by ETG
Photo: Village Savings and Loan Association (VSLA) meeting, Côte d’Ivoire
FMO’S PIONEERING ROLE
When FMO first started working with ETG in 2019, the company had three sustainability officers. Now, there are over 300, and sustainability is integral to the company’s strategy. FMO was the lead coordinator on ETG’s environmental & social action plan (ESAP), as well as providing funding for expansion and support on governance.
“It felt like a natural fit for FMO to take the lead on the sustainability-linked loan as well,” says Paul. “There are not many other parties that are familiar with our company and our ESAP, and have the capability to convene DFIs and investors from multiple continents under one agreement. FMO has both the network and the reputation we need – so they seemed like the right party for the job.”
“The agreement brings together parties from three continents – Africa, Europe, and North America – combining both private and public sectors. This loan will act as a blueprint going forward.”
Guus adds: “The syndication aspect was very important to us. Not only were we investing our own funds and those of the other DFIs; we were also able to mobilize a host of other impact and institutional investors from the private sector. It’s a win-win-win for ETG, the DFIs, and the private investors.”
The deal involved a lot of teamwork: FMO did the initial legwork when it came to coordinating with the other investors (including the commercial banks), drawing up the documentation, and managing the sustainability requirements. Just as crucially, as joint arranger TDB coordinated the disbursement process and is the facility and payment agent during the lifespan of the loan.
Photo: Cashew farmers, Zambia
SUSTAINABILITY AS A LICENSE TO OPERATE
What’s next after this deal? For ETG, it’s continuing to make a difference: “We’ve defined targets for the next five years,” says Paul, “so the direction and framework are already in place. Now it’s about reaching those million farmers, better tracking and reporting our progress, and building on our robust sustainability framework by bringing in diverse sources of funding. Sustainability will be part of our license to operate.” For FMO, it’s about maintaining an active relationship with ETG as a client. Coen concludes: “We’re keen to support ETG on their goals in terms of sustainability, governance, and accessing capital markets. We see this SLL as an anchor facility for ETG that will support further harmonization of the group’s banking facilities going forward. We hope it will inspire others to follow ETG’s example of connecting finance and sustainability. And of course, we have a second closing to think about: our aim is to reach USD 500 million and extend the tenor of the loan to five years. Onwards and upwards!”
“We see this sustainability-linked loan as an anchor facility for ETG that will support further harmonization of the group’s banking facilities going forward. We hope it will inspire others to follow ETG’s example of connecting finance and sustainability.”
A FUTURE WE CAN FORESEE IS A FUTURE THAT WE CAN CREATE TOGETHER
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