Green Bonds in the Plastics Industry: Mission Impossible Becomes a Financial Success
Dr. Eszter Kamocsay-Berta, managing partner, KCG Partners Law Firm
Environmental, social, and governance criteria are an increasingly popular way for investors to evaluate companies. ESG is also highly favored by issuers, as investors have shown great interest in putting their money where their values are in recent years.
Industrial machinery and equipment company Deltaplast, a mid-size Hungarian manufacturer of plastic tools and components, might, at the first glance, seem an unlikely candidate for the ESG market. The successful issuance of Deltaplast Inc.’s green bond earlier this year shows, however, that keeping up with ESG standards can yield financial resources for development at an attractive price, even in the plastics industry. The more companies that follow Deltaplast’s example, the more sustainable, ESG-governed industrial growth can be expected. For the time being, ESG offers a competitive advantage on the Hungarian capital market.
The Magic Abbreviation: ESG
ESG refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company. Most socially responsible investors check companies out using ESG criteria to screen investments based on a subset of non-financial performance indicators, including sustainable, ethical and corporate governance standards.
Environmental criteria consider how a company performs as a steward of nature and what efforts the corporation is willing to make to lower its carbon footprint. Social standards examine how the corporation manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights by ensuring that there are systems in place to ensure accountability.
Deltaplast Inc. is a Hungarian corporation with production sites in Kecskemét that manufactures plastic products for the industrial machinery and equipment industry. Deltaplast has two types of businesses: PET preform sales and a technical parts (also called injection-molded plastic) production unit. It has more than 30 years of production experience, employs 188 people, and is Tier 1 supplier to seven different automotive customers in 15 markets. The management’s dedication to innovation was benchmarked by cooperating with the Neumann János University of Kecskemét to work on industry-induced R&D projects together.
Rationale for Issuance
The company decided to issue green bonds to finance the expansion of its manufacturing capacity and to optimize production processes by increasing energy efficiency and, at the same time, reducing the waste generated during manufacturing.
The project includes implementing a new factory hall featuring the latest energy solutions (for example, waste heat recycling) and an up-to-date production line for the manufacture of technical parts.
ESG Standards to be Benchmarked
For a successful green bond issuance, Deltaplast’s Green Finance Framework was benchmarked against the International Capital Market Association’s Green Bond Principles to verify the alignment. This helped to assess the sustainability credentials of the company’s green finance instruments, as well as its sustainability strategy. In addition, it identified the extent to which those green finance instruments positively contribute to the UN Sustainable Development Goals (SDGs). The 17 SDGs were endorsed in September 2015 by the United Nations and provide a benchmark for critical opportunities and challenges toward a more sustainable future.
Deltaplast’s Green Finance Framework proved to be in alignment with essential Green Bond Principles’ categories and with important SDGs. Thanks to this, Deltaplast was able to conduct a HUF 3.3 billion bond issuance at an interest rate of 4.8%. The resources this generated will help finance the development of a new manufacturing plant, enabling the issuer to increase production capacity by 40-50% in compliance with the ESG standards. The example of Deltaplast shows that ESG generates a considerable competitive value in the Hungarian capital market.
This article was first published in the Budapest Business Journal print issue of April 22, 2022.
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