How women in boardroom count towards companies’ borrowing costs

Companies around the world are increasingly willing to link their borrowing costs to gender equality, as they face pressure to lift the number of women in management.

Dubai-based mall operator Majid Al Futtaim Holding signed a $1.5 billion sustainability-linked loan last week, agreeing to pay extra in interest rates if it fails to increase the share of women on its board or in senior roles to 30 per cent. That followed Australian supermarket chain Coles Group taking a similar step with its A$1.3bn ($1bn) loan.

Sales of loans with terms tied to gender goals have surged to $19bn so far this year, more than four times 2020’s total, according to BloombergNEF data. That kind of growth is exceptional, even within the booming market for ethical debt, reflecting the push to factor in social justice taking off since the Covid-19 pandemic and the #MeToo movement.

“Companies are using these products to help drive performance and cultural change in line with their corporate strategies,” said Tania Smith, director of sustainable finance at Australia & New Zealand Banking Group, which led the deal for Coles. “Improved workplace diversity can enhance staff retention, improve collaboration, enrich decision making and enable access to a wider talent pool.”

The volume of such debt is still just a fraction of the $231bn in loans this year with disclosed metrics for environmental, social and governance (ESG) targets. It’s an even smaller proportion in the bond market, making up around $3bn or 5 per cent of sustainability-linked bonds, where metrics involving the environment have dominated.

Banks arranging loans are expecting more such transactions on the back of increased inquiries about gender metrics. Socially-focused debt jumped on to investors’ radars last year when the European Union broke demand records with its debut.

“We have witnessed over the past two years a significant number of borrowers wanting to demonstrate that they have a holistic approach to sustainability,” said Hedi Ben Salem, head of corporate lending for Europe and Asia at Spanish financial services company Banco Bilbao Vizcaya Argentaria. “We firmly believe that this trend is set to continue.”

It is leading to companies combining environmental and social targets when structuring sustainability-linked loans. Women in management positions and work safety are the most-used social key performance indicators in recent financing, Mr Ben Salem said.

The UK also plans to combine social and green benefits in its ESG bond debut this month.

Regulatory requirements for listed companies to disclose senior female representation in countries such as the UK, US, Hong Kong and Japan have helped push companies to improve, said Nneka Chike-Obi, director for sustainable finance at Fitch Ratings.

A recent deal by US gas pipeline company Enbridge, where only one of three goals in its sustainability-linked bond were tied to emissions, shows “an evolution in focus on diversity and inclusion”, she said. The others were on racial and ethnic diversity, and women on the board.

In the US, the proportion of women on a majority of S&P 500 boards rose above 30 per cent for the first time last month, a result of years of investor pressure and regulations. Majid Al Futtaim’s chief executive Alain Bejjani is nearly halfway there, and wants to achieve that level in five years.

It is hard to know yet if the risk of higher borrowing costs has improved equality. Sustainability-linked debt overall has come under fire for some companies setting targets that are either easy to reach or that they were going to make anyway.

Suez Environnement took a SLL in 2019, and data from 2020 shows a small increase in its percentage of women in senior management, but below a goal of 33 per cent, said Fitch’s Ms Chike-Obi. Similarly, Continental’s 2019 SLL set a similar target of 25 per cent women by 2025 and reported an increase of just 0.3 per cent from 2019 to 2020.

“The bulk of sustainability-linked products have been issued since 2020, so it is too early to say if there has been any impact,” she said.