Case study: Polymetal's green financing

When Polymetal International, a gold and silver mining company with a market value of over £7.5bn, undertook a green loan last November, it was one of the first such initiatives in the global metals and mining industry.

The FTSE-100 listed group miner with production assets in Russia and Kazakhstan, launched a $125m green loan to finance investments in transition to a sustainable and low-emissions economy.

Eugenia Onuschenko, Polymetal’s head of corporate finance, says the financing “ensures responsible financing by aligning capital with the company’s strategy and strong ESG performance”. The company  has been focused on a carbon transition strategy and its sustainability-linked and green finance portfolio is now approaching a value of around $300m.

The only Russian member of Dow Jones Sustainability Indexes, Polymetal has scores of between four and five for all criteria set by FTSE4Good; and an ESG rating of A from MSCI.

Although it has been using sustainability financing since 2018, including a sustainability-linked loan of $80m and a $75m KPI (key performance indicator)-linked loan, the decision to launch a green loan was a new departure, as it “requires transparency about how your projects fit within the eligible green categories,” says Onuschenko.

“As a general rule, a green loan requires an external independent review of green projects, as well as a company’s ESG strategy and corporate governance practices and policies. It must be proven that the funds actually will make a positive environmental impact.

“It requires a business to be ready at every level, from operational management to the board, to deliver the initiative, because you have to clearly communicate to your lenders your business’s sustainability objectives,” she says. Along with many stakeholders involved in the process, Onuschenko says Polymetal is sending a message to employees of the need to promote sustainability across the organisation. “Especially with the KPI-linked loans, because they work as an additional incentive demonstrating a direct link between our ESG performance and the positive impact on our financial result which can be achieved with a decreased interest rate,” she says.

“From the investor perspective, the company’s commitment and proactive approach to improving its ESG profile and transparency about its sustainability performance is no longer an option, it is a must for anyone caring about their share price. It is certainly expected from us.

“What we observe now is the sustainability revolution, a tectonic change in investor priorities resulting from an increased recognition that well-governed companies that create a positive social and environmental impact, can generate stakeholder value better, over a longer term,” says Onuschenko.

“It’s been proven that high sustainability companies which integrate the ESG into strategy and are committed to improvements have outperformed their peers,” says Onuschenko, quoting the DJSI (Dow Jones Sustainability Index outperforming the DJ Industrial and MSCI World MM Index over the last 12 months.From Polymetal’s management perspective, the green loan is a way of aligning sustainability and profit. “With the right approach, green finance can help to optimise cost of debt. Without disclosing specific commercial information, I can say that I used our first mover advantage in each of our three cases with sustainability financing, to achieve best commercial terms.

Implementing the decision

Onuschenko says Polymetal approached the market with a green financing framework to accompany the draft proposal for the green loan, which effectively describes the company’s sustainability strategy and what objectives they were seeking to achieve with the loan.

Informal talks with lenders were started about a year ago, having informed the markets that the next step in terms of sustainability finance would be a green loan with the proceeds allocated specifically to initiatives such as renewable energy, waste management and efficiency projects. The idea was fully supported by Polymetal’s board, says Onuschenko.

“We wanted financing over a long-term horizon, so we were aiming for at least a seven-year facility to align with relatively long-term payback periods in some of the green project categories.

“Finding lenders prepared to offer such a product over this time horizon proved challenging. Not many European banks are prepared to provide such a long-term financing to a Russian-based company due to their risk perception. Five years’ term is usually the maximum period.

“We also focused on the ESG expertise of potential lenders, as their knowledge would be key to supporting us in this process. This is especially important when you undertake this kind of project for the first time, as you need to explain the strategy to a second party opinion (SPO) provider that scrutinises the deal,” she says.

In this case the external review of Polymetal’s policies and strategies was conducted by a firm called Cicero that assessed the group’s approach to sustainable development in line with the UN’s Sustainable Development Goals (SDGs).

The projects financed by the green loan will contribute to Polymetal’s goals to decrease its freshwater use by 11 percent and emission of greenhouse gases by five percent (both by 2023 vs 2018) and recycle 16 percent of its waste by 2023.

Cicero gave Polymetal’s green financing framework a Medium Green shading and a governance score of Good.

“From the outset we discovered that not all SPO providers were keen to work with gold mining companies. With our green financing framework, Polymetal has set a precedent for the mining industry, by including mining-specific projects, such as underground backfilling (waste re-use) and dry stacking, into eligible green project categories,” says Onuschenko.

Communicating the impact

Polymetal commits to publish its Green Loan Report on an annual basis until the full allocation of green financing proceeds, says Onuschenko. She says the allocation of proceeds will be audited at the end of the two-year allocation period.

“It gives comfort to investors and lenders that the amount of loan spent on these projects was fully in line with the company’s guidance. Polymetal will also prepare a set of reporting indicators to describe the environmental benefits as a result of the project implementation,” she adds.

The company has established a dedicated green financing committee with representatives from corporate finance, sustainability, operational, environmental and project teams. The committee will be responsible for monitoring reporting and compliance in line with the green finance requirements in the credit agreement, identifying impact metrics and annual reporting for lenders.

Onuschenko says the general perception of the green loan was very positive with the initiative resulting in greater interest from other lenders. “We have received multiple requests from other banks who want to work with us on similar projects,” she says.

In terms of Polymetal’s employees, the green financing framework has resulted in increased staff engagement, because the process required considerable teamwork from across the group, says Onuschenko.

“Our people understand that green credentials of the company go far beyond the projects participating in the green loan scheme. Polymetal also invests hundreds of millions of dollars in greener technologies, such as POX (pressure oxidation), which helps to process refractory concentrate avoiding polluting effects of traditional methods such as roasting. All of these elements demonstrate that we are a forward-looking company with a genuine commitment to reducing its environmental footprint,” she adds.

There is also the additional prospect of an improved interest rate agreed with lenders if the terms of the green loan agreement are met, says Onuschenko, although she declined to discuss numbers. “The interest rate adjustment mechanism is always tailor-made and can be negotiated with lenders.

“We believe that a discount/ penalty in case of a sustainability-linked finance shall be substantial enough to incentivize a sustainability performance and , as a result, should help to optimize cost of debt. Similar logic should apply to green loans, although in this case longer tenure is much more important because the funds are allocated towards investment projects,” she adds. (ends)

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