What SK Geo Centric’s sustainability linked loan means for South Korea’s net zero ambitions

South Korea aims to become carbon neutral by 2050. What makes this transition particularly challenging for Asia’s fourth largest economy^[1] is its reliance on petrochemicals, and on carbon-intensive industries, including steelmaking, chemicals, and shipbuilding.

South Korea has taken several steps towards sustainable finance, becoming the seventh largest issuer of green bonds in the first half of 2022, second only to China across Asia^[2]. Apart from green bonds, South Korea’s largest companies are evaluating several new options including sustainability-linked loans (SLLs). In a typical SLL, borrowing costs are linked to sustainability targets. A company that achieves these goals can acquire funds at reduced costs. However, if the targets are not met, a margin premium is levied. SLLs are gaining popularity among companies with strong sustainability credentials.

International petrochemical company SK Geo Centric (SKGC) is among the South Korea-based corporates focussed on sustainable products, working towards the targets of a 50% reduction in carbon emission by 2030, and net zero by 2050. Under its ‘Green for Better Life’ vision, the company is eliminating plastic waste, following the three ‘R’s’: reduction in the consumption of plastic, replacements of pollutants with cleaner alternatives, and recycling. It is working towards a recycling capacity of 2.5 million tonnes by 2027 under its Plastic Zero strategy.

Last November, SKGC secured a KRW475 billion (approx. $375 million) sustainability-linked loan (SLL). It is South Korea’s first SLL in line with international standards, aligning to both the International Capital Market Association’s (ICMA) Sustainability-Linked Bond Principles (SLBP) and the Loan Market Association’s (LMA) Sustainability-Linked Loan Principles (SLLP). The SLL was arranged by BNP Paribas. Jong Gab Seo, co-head of corporate coverage group, South Korea, BNP Paribas said, “South Korean companies recognise that sustainable business is the future. Utilising the full range of ESG financing options can bring them closer to the realisation of their net zero targets. This deal demonstrates that well despite the challenging market conditions.”

Speaking about the SLL, Na Kyung-Soo, CEO of SK Geo Centric said, “This large-scale sustainability-linked loan is the first of its kind in Korea, verified by a global certification body. It is very meaningful as we transition into a more sustainable business model. SK Geo Centric will operate in a sustainable manner and carry out social responsibility at the same time, expanding its position as a global market leader in the circular economy field.”

The verification of the funding will be conducted by DNV, an independent reviewer which will provide a second-party opinion on whether SKGC is meeting its targets.

Chaoni Huang, head of sustainable capital markets, Asia Pacific at BNP Paribas said, “Engaging a recognised body to monitor SKGC’s SLL is a crucial part of the loan documentation. The independent assessment provides lenders confidence that the loan’s framework is robust, while at the same time aligning with the company’s overall operational and investment plans.”

The SLL is particularly significant since it proves that South Korean corporates in carbon-intensive industries can align sustainability and debt requirements to the rigorous standards of international sustainable finance.