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May 12, 2022updated 16 May 2022 8:21am

Behind Landmark’s milestone sustainability-linked loan

The Dubai-based mall operator’s new debt facility has a groundbreaking structure and aims to boost the already-high female share of its workforce, not to mention heavily increase the company's solar capacity. Landmark has Scope 3 emissions in its sights to boot.

By Adrian Murdoch

sustainability-linked loan
Rajesh Garg, group CFO of Landmark Group, plans to make all the company’s financing sustainability-linked over the next couple of years. (Photo courtesy of Landmark Group)
  • Dubai-headquartered mall operator Landmark Group has signed a sustainability-linked loan with targets based on energy management, recycling and gender diversity.
  • The money that Landmark saves or pays out from its new loan’s step-up and step-down structure, respectively, will go towards sustainability initiatives.
  • Green, social and sustainable bond issuance in the Middle East has not risen as much as expected this year, but sustainability-linked financing is tipped to soar.

The Middle East may boast several countries with the highest carbon emissions per capita in the world, but its retail public view themselves as an environmentally friendly bunch.

In March, in its first consumer report on the Middle East, PwC reported the importance of sustainability to the region’s retail sector. The consulting firm found that 60% of the region’s consumers say they are eco-friendly, and the same proportion consider sustainability factors when deciding what to buy. This is well above the global average of 42% for the latter point.

It is perhaps appropriate then that the region’s retail property companies have been quick to see the benefits of sustainability-linked funding as a way to emphasise their green credentials.

In early April, Landmark Group became the region’s first pure-play retail property conglomerate to sign a sustainability-linked loan. And the Dubai-headquartered company plans to make all its financing sustainability-based “in a phased manner” over the next couple of years, says group chief financial officer Rajesh Garg.

The deal comes after Dubai-based real estate group Majid Al Futtaim (MAF) took out a $1.5bn sustainability-linked loan in August last year, with key performance indicators (KPIs) linked to carbon emissions reduction, Leadership in Energy and Environmental Design (LEED) certification for its malls and a gender diversity target.

Like MAF, Landmark is going against the grain in the culturally conservative and petroleum-heavy region by setting targets linked to the use of renewable energy, managing waste and gender diversity. The KPIs build on the considerable work the group has already done in these areas.

Founded in Bahrain in 1973, Landmark now has some 42,000 employees and 2,200 stores across 21 countries throughout the Middle East, India and North Africa. The group does not disclose revenues as it is privately held, but it is estimated by research platform Owler that it hit $8.2bn last year.

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Garg says he initially agreed to the sustainability-linked loan as a test. Being Landmark’s first such deal, the transaction took six months to put together rather than a more typical 15 days for a conventional loan. He declined to reveal the size of the loan, saying only that it is a revolving facility of more than $100m that makes up only a small portion of the group’s debt.

Environmental and social targets

The first KPI revolves around energy management. Landmark already generates 6,000 megawatts (MW) a year from solar; the target is to increase that by 10% in each of the next two years. This is a small step but it is in the right direction. In 2019, the company’s electricity consumption was 776,214MW, and it used 145,911 litres of diesel and 2.2 million litres of petrol.

Landmark plans to achieve its goal by ensuring renewables cover half the energy consumption of all the group’s warehouses in the UAE, Saudi Arabia and Bahrain, which are home to its largest such facilities.

The group already tracks energy use in its stores, offices and warehouses, broken down into up to 100 data points, including ambient temperature in each part of the building, lighting, footfall and the speed of fans. This allows the company to identify problems quickly.

The second KPI is based on recycling packaging, specifically cardboard and polystyrene. Last year, Landmark recycled 84% of its corrugated cardboard packaging. It has set a new target of hitting 90% within the next two years.

Products come into Landmark’s warehouses, whence they are dispatched to individual stores in tote bags or cardboard cartons. The packaging is then returned to the warehouses, where it is either reused or sent to certified recyclers.

The third KPI is about gender diversity: the target is to increase the female participation to 36% of the workforce within the next two years, up from 34% now. That is well above the average 19% female labour force participation across the Middle East and North Africa, by World Bank figures for last year.

The tone is set from the top: Renuka Jagtiani, the wife of the founder, is chief executive and chair of Landmark, and three of the five-strong board of directors are women. What’s more, the group is the largest private employer of women in Saudi Arabia, Garg says. Around 80% of its 5,300 staff in the kingdom at the end of last year were women.

PwC is Landmark’s main auditor and will assess the KPIs every year.

The company’s first sustainability report dates from fiscal year 2019, and Garg says a “broader and more holistic” update will appear in the next six months. It will cover all of the key KPIs and, given rising interest in Scope 3 emissions (those generated not by the company directly but by its associated activities) take into account both supply chain and consumer use of Landmark products, he adds.

Win-win for Middle East sustainable financing

An interesting detail in the sustainability linked loan structure is that whether or not Landmark hits its KPIs, the proceeds will go into sustainability initiatives such as climate research or carbon offsets.

If the company meets its targets, it will take the cost savings from the step-down and put them into sustainability initiatives; if it does not, rather than booking the step-up funds as profit, arranging bank Standard Chartered will recycle the funds into its own sustainability initiatives, says Oliver Phillips, Dubai-based associate director of sustainable finance, who structured the loan.

While Asia has seen structures whereby step-up funds have been used for sustainability initiatives rather than going to investors, this is the first time this has been the case for a step-down structure, according to Standard Chartered.

While the Middle East’s green, social and sustainable (GSS) financing markets appear to be maturing – as seen in the sheer variety of debt structures (see chart) – volumes are down in 2022.

Last year saw $11bn from 21 deals in the Middle East last year, according to Capital Monitor figures, while the first four months of the year saw around $3.8bn of GSS bond issuance, most of which came from banks. That was not the post-Covid bounceback for sustainable financing in the Middle East that had been expected. Debt raising has been slower this year amid market uncertainty in light of volatility around US interest rates and the Russian invasion of Ukraine.

Following volumes of $6.95bn of last year, according to Bloomberg, by the end of April half that sum had already been raised in the loan market, says Standard Chartered’s Phillips. In the GCC alone, approximately $3bn worth of sustainability-linked or green loans were raised between January and end of April this year. This compares to roughly $5bn in 2021. “We’re seeing interest, particularly, from the hard-to-abate sectors. The importance of transition has been stressed.”

For instance, Aluminium Bahrain, better known as Alba and the world’s largest smelter outside China, refinanced its existing syndicated loan at the end of April with an eight-year $1.25bn sustainability-linked loan. It was the first such structure from the Arab state, with KPIs linked to recycling, training and safety.

In the aftermath of the Cop26 climate summit in Glasgow last year, commitments across the region at a sovereign level – such as Qatar’s pledge to cut emissions by 25% by 2030, the UAE’s net-zero pledge by 2050, and Saudi Arabia’s promise to achieve net-zero by 2060 – have put sustainability initiatives front and centre.

Garg says he hopes Landmark’s sustainability-linked loan will kick-start “an avalanche” of companies embracing sustainability-linked funding. He could well be right.

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