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Retail: How Shoprite’s novel sustainability-linked loan works

South Africa's largest retailer signed the largest sustainability-linked loan in the sector. We explain how it was put together.

By Adrian Murdoch

sustainability-linked loan, Shoprite
Sanjeev Raghubir, group sustainability manager at Shoprite, says that the decision to take out a sustainability-linked loan was a no-brainer. (Photo courtesy of Shoprite)
  • As part of an R3.5bn ($194.2m) package of borrowing, the Shoprite Group took out an R800m three-year sustainability-linked loan from Standard Bank.
  • The key performance indicators for the loan are based on renewable energy, recycled cardboard and plastics, and sustainable packaging.
  • Each key performance indicator (KPI) for the loan not only has its own movement over the length of the loan, it is also cumulative.

South Africa has lagged the rest of the world with sustainable finance. It is probably 12 to 24 months behind Europe, regional bankers tell Capital Monitor.

Their assessment is backed up by deal volumes. There have been only a handful of sustainability-linked loans in the country over the past 12 months.

It is true that volumes may be lower than the rest of the world, but there is a nuance to the structuring that is second to none.

In late August, as part of an R3.5bn ($194.2m) package of borrowing, the Shoprite Group, the largest South African retailer by market capitalisation, took out an R2bn sustainability loan from Standard Bank and an R700m green loan from RMB which will be used to fund the group’s environmental programmes, as well as an R800m three-year sustainability-linked loan from Standard Bank.

This means that green borrowing now makes up a significant two-thirds (66.3%) of the group’s bank borrowings, according to Shoprite’s annual report.

The only sustainability-linked borrowing in the sector previously came from rival Woolworths in June last year.

Founded in 1979, Brackenfell-headquartered Shoprite operates more than 2,989 stores across South Africa and 11 African countries.

Sanjeev Raghubir, group sustainability manager at Shoprite, says that the decision to take out an sustainability-linked loan was a no-brainer. “The issues around climate change are very real for us both directly and indirectly in terms of our supply chain,” he says.

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Quite a stretch

The three key performance indicators (KPI) that Shoprite settled on were the ones that Raghubir says were “the most material” – one on renewable energy and two on recycling.

The first KPI is a target to increase the volume of electricity from renewable sources. For the first year it was 2.5%, for the second it is 5% and next year it will be 7.5% [see chart].

This is what Raghubir admits will be “quite a stretch” for Shoprite. “We know that just relying on our rooftop solar is not going to be enough,” he says.

Access to renewable energy remains a challenge. According to the 2021 electricity report from London-based global energy think tank Ember, coal accounted for 84.4% of South Africa’s electricity production last year.

The only widespread way to access renewable energy is via state-owned utility Eskom. Although there are private energy suppliers, Shoprite is wary of increasing energy costs significantly. “Our purpose is to be the most affordable and accessible retailer on the continent,” Raghubir points out.

The second KPI is to increase the rate of recycled cardboard and plastics by 5% a year over the life of the loan. Last year the group recycled 40,327 tonnes of cardboard and recycled 7,816 tonnes of plastic into plastic bags – up 3.2% and 3.6% respectively.

At the same time, it diverted 8,207 tonnes of plastics from landfill – a decline of 12.7% on 2020, thanks both to recycling efforts but also, Shoprite says, because it has increased the number of reusable plastic crates to transport fresh produce to stores.

The annual organic growth of recycling, Raghubir says is in the region of 3.5% to 4% and what he calls “the stretch target” has been set as he believes that Shoprite can be more efficient in the way it separates at source in the stores and within the retailers’ distribution centres.

Shoprite has taken a top-down approach to achieve this KPI. It has been linked to the bonuses of executives who are expected to drive it into operations, the regional managers and then the shop floor.

The third KPI is based on sustainable packaging. The company is aiming for 100% by 2025, but for the loan, it has agreed that it will not slip below the current level of 91%.

Plastics remain a huge problem for Africa.

Although the per capita consumption of plastics remains relatively low, the Ellen Macarthur Foundation estimates that in Algeria, Egypt, Morocco, Nigeria, South Africa and Tunisia, the imports of plastics will double by 2030 to 165m tonnes.

The challenge, explains Raghubir, is that while some of the packaging that the company uses is recyclable, it cannot be processed in South Africa.

He gives polyethylene terephthalate (PET) products as an example. While PET bottles are widely recyclable in Africa, PET fruit or vegetable punnets are not.

“Our definition is that if something is recyclable technically but not recycled in South Africa, we can't count that as recycled,” he says.

While Shoprite will continue to “chip away” at the problem of plastics, Raghubir again emphasises that a priority for the company is that it remains “an affordable retailer”.

Over the life of the loan, the external auditor will be Johannesburg-based Motlanalo Chartered Accountants and Auditors and progress will be detailed every year in the sustainability report.

The moving parts of a sustainability-linked loan

In structuring the loan, Anneke Lund, executive for sustainable finance at Standard Bank, explains the process to make sure that the KPIs have “ambitious additionality”.

When doing its due diligence, the bank looked at Shoprite’s historical data going back at least three years. But when assessing the targets, it looked not just at what the borrower was proposing, it compares this to what other companies within the retail sector are doing.

“We expect to see a step up,” she says. “We expect to see the ambition and additionality come through in the targets.”

What historic analysis and peer analysis reveal is whether the borrower is “leading or lagging” on specific KPIs. This is then reflected in what targets are set.

If a company is lagging in one particular field, then the improvement required will not be 10% it could be 15% or 20%. Conversely, if a company is leading in one KPI, that analysis reveals whether a 5% improvement could be a challenge or even “to stay where they are is going to be really hard”.

In terms of pricing the loan itself, the sustainability-linked loan market has moved on, Lund says, from an “all met, none met, some met” pricing structure where a company’s performance against the KPIs is assessed together.

Structuring loans this way is a way of differentiating the materiality and ambition within the loan and what is starting to emerge in Europe, says Lund, is different weighting for different KPIs within a loan.

“We're now at a point where we are looking at the KPIs and able to say that this one is super material,” she says.

The Shoprite loan takes a more granular approach, and the discount is not only on a “per KPI” basis with each one having its own movement over the length of the loan, but it is also cumulative.

Although the base coupon on the loan has not been disclosed, the savings (or penalty) that Shoprite can achieve are three basis points (bp) for the first year, 6bp for the second year and 9bp over the length of the loan.

It is a type of loan that has clearly found favour with Shoprite. Although Raghubir says that it is too early to have a conversation about making all of the group’s lending sustainability linked, he has plans to sign another similar loan for up to R1bn with Absa Bank by the end of the year.

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