Deutsche Bank and Olam International have announced the successful execution of Asia’s first FX derivative linked to environmental, social and governance (ESG) key performance indicators (KPIs).

The ESG-linked foreign exchange (Thai baht/US dollar) forward enables Olam to lock-in a discount when it meets pre-defined ESG targets which supports the United Nations (UN) Sustainable Development Goals (SDGs).

“Supporting our clients’ transformation towards sustainability is a key plank in Deutsche Bank’s strategy," said David Lynne, head of Fixed Income and Currencies and Corporate Bank APAC and chief country officer Singapore at Deutsche Bank. "Deutsche Bank aims to lead the industry by creating innovative ESG financial solutions to accelerate the adoption of sustainable practices by our clients across the world."

The FX risk solution marries the requirement to hedge the FX risk arising from growing a crop in one country and selling it to another country, and supports Olam’s programme to strengthen supply chain sustainability.

“Olam is delighted to partner with Deutsche Bank to implement Asia’s first ESG FX solution," commented N Muthukumar, managing director and group CFO at Olam. "This innovative facility provides us with a hedge on our currency risk exposure and enables Olam to lock-in a discount when we meet pre-set ESG targets that are aligned with our sustainability strategy and the United Nations Sustainable Development Goals. This is yet another way we are living our purpose of reimagining global agriculture and food systems.”

Growth of sustainable finance

The sustainability-linked derivative follows the concepts enshrined in the Loan Market Association (LMA) Sustainability-linked Loan Principles (SLLP), and follows the EU Sustainable Finance taxonomy.

“Green Finance has to date largely involved sustainability-linked loans, bonds and equities, where market standards are becoming standardised," said Kamran Khan, head of ESG APAC at Deutsche Bank. "This sustainability-linked derivative transaction leverages Deutsche Bank’s world-class execution expertise and commitment to ESG to open an important new path for the global sustainable finance market.”

Deutsche Bank says that sustainability is a key pillar in its transformation. It has committed that by 2025 its total volume of sustainable financing and investments will be at least €200bn, and that its operations will be powered entirely by renewable energy sources. In Asia Pacific, the bank recently appointed a dedicated head of ESG in a newly created role.

Why the FX forward is needed

Olam exports agriculture products from farms in Thailand to the rest of world. The company executed a 1-year USD/THB FX forward to hedge its exports. It sources these products from farms in Thailand in THB and sells them to customers who pay them in USD. This exposes Olam to USD/THB currency risk, hence the need for the FX risk management action.

The transaction KPIs will contribute to 10 of the 17 UN SDGs, including alleviating poverty (SDG 1); alleviating hunger (SDG 2); improving gender quality (SDG 5); improving clean water and sanitation (SDG 6); reducing inequalities (SGD 10); increasing responsible consumption and production (SDG 12); contributing to climate action (SDG 13); protecting life below water (SGD 14); protecting life on land (SGD 15) and increasing partnerships for the goals (SDG 17).

Olam also secures a US$250m sustainability-linked loan

In the past week, Olam has also secured a US$250m sustainability-linked loan. Olam International Limited (Olam) and its wholly owned subsidiary, Olam Treasury Pte. Ltd. (OTPL), secured a revolving sustainability-linked credit facility aggregating US$250m. The facility is linked to meeting key sustainability performance indicators (KPI). 

The facility consists of three tranches - a 1-year revolving sustainability-linked credit facility (SRCF) of US$50m, a 2-year SRCF of US$100m and a 3-year SRCF of US$100m. The interest margin on the facility is linked to the achievement of sustainability KPI improvement targets and could be lower than comparable conventional loans, if those targets are met.  

The KPIs will be tracked and reported by Olam’s Corporate Responsibility & Sustainability team. Ernst & Young will perform procedures to independently assess the achievement of the KPIs.  

Olam has appointed three banks - ANZ, DBS and Standard Chartered Bank as senior mandated lead arrangers and joint sustainability co-ordinators, and Rabobank as mandated lead arranger. Standard Chartered Bank has been appointed as the facility agent. Proceeds from the facility will be applied towards general corporate purposes of Olam and its subsidiaries.

This is the third such facility secured by Olam. It announced a US$525m sustainability KPI-linked RCF last year and Asia’s first sustainability-linked club loan of US$500m in 2018.