Danone’s Positive Incentive Financing Strategy

Thanks to the strong strategic commitment to a long-term sustainability, corporates and banks together are achieving a great outcome.

Over the last few years, leading companies have invested heavily to meet sustainable targets in line with shifting investor objectives and broader shifts in thinking in society at large. While the Paris Agreement of 2015 was a great step towards creating a global framework for political actors and countries around the world, the specific efforts of some of the world’s largest asset managers are possibly even more important on a day-to-day basis.

While still in the early stages, companies with advanced sustainable strategies have already achieved a lot and have started to reap the benefits of their efforts.

In the capital markets, these benefits may consist of:

  • a lower long-term risk assessment from investors and lenders, which makes them appealing to the stock market, and
  • an enhanced cost of financing through the use of dedicated green products.

The most forward-thinking firms in the food industry have been leading the efforts to become more aligned with sustainable goals and started taking advantage of green finance early on as a meaningful way to achieve their ambitions.

Danone’s commitment to value creation in a sustainable manner

The Danone strategy has for a long time been to establish itself not only as a leader in its own industry but as a driver of the entire sustainable ecosystem through commitments to “Strong Profitable Sustainable Growth” and promoting healthier eating and drinking habits globally.

Danone has put in a lot of effort to reposition its products as healthy. Its plans on clearer communication on product content and the wider social responsibility of the group should be helpful to bolster positive consumer behaviour.

Danone has identified the key pillars of its business model based on Health, Nature and Social underpinning its economic and financial performance. These pillars are underlined by the Company’s new motto, “One Planet, One Health”, which emphasises a vision that human health is at its core connected with, and interdependent on, the health of the planet.

After its acquisition of WhiteWave, Danone adopted a new reporting approach with a new breakdown of its business units and geographical markets. DanoneWave, which has been incorporated as a public benefit corporation (“B-Corp”), is the newly combined entity of WhiteWave and Danone’s dairy business in the US, while the Fresh Dairy Products division includes Danone’s dairy businesses in the rest of the world (mainly Europe). In addition, they have combined Early Life Nutrition and Medical Nutrition into a new division named Specialized Nutrition.

At the heart of its strategy, Danone’s values are aligned with the United Nations Sustainable Development Goals, and the company even aims to obtain a global B-Corp certification in recognition of its institutional efforts – an objective sought by its competitors.

B-Corp is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk. B-Corps are for-profit companies certified by the non-profit B-Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.

The demand for green financial products is increasing in depth and breadth

Sustainable bond issuance by currency
[Bloomberg, BNP Paribas, June 2018]

In parallel, over the past few years, the market demand for green financial products has increased, with a new depth of investment pools focusing on this new asset class.

In the past five years the total market has grown rapidly, with demand coming from a diverse range of industries.

Evolution of primary sustainable issuance
This expansion has been driven by a combination of the increased availability of dedicated pools of capital, recurring demand from asset managers for sustainable efforts by investee companies, improved framework of taxonomy, standardisation of scoring methodologies used by ESG service providers, and efforts from leading companies to align with the United Nations Sustainable Development Goals.

The other driver of the development of this “green” asset class is the expansion of the breadth of financial products available, which can adapt to a range of corporate needs that “vanilla” green bonds cannot always fulfil. Positive Incentive Loans (PILs), for example, are one of the fastest growing products, with a mechanism including discounts or premiums applied to the financing margin depending on the issuer’s ESG score.

Range of sustainable products offered by BNP Paribas

Danone’s breakthrough €2bn Positive Incentive Loan facility

This favourable ecosystem allowed Danone and its banking pool, including BNP Paribas acting as sustainable coordinator, to achieve a breakthrough in February 2018, leading to the issuance of one of the largest ever PILs in the market. The €2bn Positive Incentive Loan facility with discounts and premiums assessed on a 12 month basis allows Danone to leverage its efforts in ESG. The related benefits are crystallised within the context of the framework of an indexation of a portion of the financing costs on (i) Danone’s ESG rating as established by the leading extra-financial rating agencies Sustainalytics and Vigeo-Eiris, and (ii) its transformation to a B-Corp Certified Group.

The project, led by Danone’s finance and CSR teams with BNP Paribas acting as sustainability coordinator for a pool of relationship banks and a documentation agent, was executed swiftly thanks to the maturity and preparedness of Danone as an institution and its readiness to work with the banking pool and the sustainable rating agencies. In addition to this, Danone also accepted the use of independent third parties as providers for the ESG score, in the spirit of transparency and openness.

Key feature of Danone’s PIL facility
Borrower Danone
Product Revolving Credit Facility
Date of Announcement 12 February 2018
Notional €2bn
Maturity 5 years with two potential 1 year extensions
Interest EURIBOR + Margin
Counterparties Relationship banks, including BNP Paribas
Documentation Agent and Sustainable Coordinator BNP Paribas
Positive Incentive Discount or premium on margin indexed on: (i) average of ESG scores, (ii) B Corp Certification
Credit Rating Agencies S&P and Moody’s
ESG Rating Agencies  Sustainalytics and Vigeo-Eiris

As a corporate, laser-focused on a committing long-term sustainable strategy, Danone taps the fast-growing market and increasing demand for ESG products, and harvests the underlying benefits for its development strategy. It’s a pioneering move that will allow other leading corporates globally to more easily replicate this kind of instrument and benefit both their own balance sheet and society as a whole.