When it comes to corporate financing, sustainability-linked components are playing an increasingly significant role. In 2022, Knorr-Bremse launched three sustainability-linked financing instruments. So demonstrable success in implementing sustainability measures now has a direct monetary impact.
As a thriving global mobility industry player in the field of braking and other systems for rail and commercial vehicles, Knorr-Bremse constantly strives to develop solutions for safe, efficient and sustainable transport. So, it stands to reason that acting responsibly towards employees, partners, the environment and society is an integral part of the corporate strategy. Linking ESG targets with financing instruments also sends a clear message to the outside world: Knorr-Bremse sees its high sustainability standards as the basis of its business activities and success, and it pursues sustainability measures with the utmost determination. The company ensures transparency by continuously monitoring and reporting on progress towards its targets. The sustainability-linked financing instruments therefore also act as a further catalyst for systematic implementation and review of the sustainability measures – because the financial benefits, such as reduced repayment terms, can only be realized if the defined targets are achieved. As a result, sustainability efforts additionally pay off.
The more companies advance their climate protection goals and act sustainably, the more positive the outcome. At the same time, we can regard our sustainability efforts as a kind of license to operate and growing our business.
Frank Markus Weber – Chief Financial Officer (CFO) at Knorr-Bremse AG
Increasingly, other companies or institutions choosing to employ sustainability-linked financing instruments or wanting to learn more about them are approaching Knorr-Bremse or attending official events on the topic. Sustainability-linked financing instruments were also on the agenda at Structured Finance, one of the largest finance/treasurer trade fairs in the German-speaking area, in October 2023. Rainer Gerstung, Head of Treasury Management at Knorr-Bremse, joined representatives from Deutsche Bank to explain the method and the effectiveness of Knorr-Bremse’s supplier financing program with sustainability components. One month earlier, Knorr-Bremse presented this financing instrument in a specialist webinar on the subject in collaboration with the Association of German Treasurers. The topic of sustainability-linked financing is now on the agenda of many companies. The experts at Knorr-Bremse regularly receive requests to share their experiences and lessons learned.
“It’s great if we at Knorr-Bremse can be a role model and a source of learning for others in this area,” says Knorr-Bremse CFO Frank Markus Weber. “The more companies advance their climate protection goals and act sustainably, the more positive the outcome.” At the same time, we can regard our sustainability efforts as a kind of license to operate and growing our business.” Weber believes companies that neglect the issue of sustainability will find themselves sidelined in ten to fifteen years’ time. “For example, taking out loans or issuing bonds could become difficult and costly. And those who don’t play their part in making the economic system more sustainable will simply be weeded out by the market.” He notes that analysts also focus on precisely this point: “They take a very positive view of sustainability because they see better future opportunities and higher profits in the long term for companies taking these active steps.”
Sustainable practices also pay off in financial terms. So, it is only logical to combine financing instruments with sustainability targets. This is another reason why Knorr-Bremse already has three such financing instruments in place:
In January 2022, Knorr-Bremse concluded its first ESG-linked syndicated loan. With a volume of € 750 million, it secures Knorr-Bremse’s long-term financing. The loan conditions are linked to precisely defined environmental, social and governance targets in the form of an ESG rating from the agency ISS Corporate Solutions . Accordingly, more favorable repayment conditions are granted if Knorr-Bremse’s score improves thanks to progress in terms of sustainability, as was the case with the most recent rating. If, on the other hand, the score deteriorates because targets are missed, the repayment interest will automatically increase.
With a syndicated loan, several banks join together in a syndicate to grant the loan to the borrower. This spreads the loan amount and the default risk between several banks. Syndicated loans are used for very large loan volumes. One of the syndicate banks acts as the lead manager, becoming an intermediary between the borrower and the other participating banks, so the borrower can effectively negotiate with just one party.
The second step in terms of sustainability-linked financing followed in September 2022: Knorr-Bremse raised fresh capital from the debt market by issuing a € 700 million bond. This fixed-interest bond is also linked to sustainability targets.
Bonds are fixed-interest securities. Anyone who invests in a bond has a right to receive interest at a previously agreed rate. Companies or even states issue bonds to raise money on the capital market. For buyers, bonds are generally a longer-term investment: rather than aiming for quick and high profits, they should offer a steady return on investment.
Climate and environmental protection can only succeed if everyone plays their part. It therefore made natural sense for Knorr-Bremse to create incentives for its suppliers to also step up their sustainability activities and consistently pursue their sustainability goals. For some time now, under Knorr-Bremse’s Supplier Early Payment Program, suppliers have been able to borrow money from the bank ahead of time – as soon as they receive an order, which is well before the payment is due. Suppliers benefit from Knorr-Bremse’s financial strength, which serves as collateral for the bank. As of December 2022, an effective sustainability component has been added to Knorr-Bremse’s Supplier Early Payment Program. Now, suppliers who meet certain sustainability targets not only have their loans paid out faster, but also at better conditions. The prerequisite is that they undergo an assessment by a rating agency. The entire process was designed in cooperation with Deutsche Bank to have very low barriers, making it attractive even to smaller suppliers. The program, which is currently being successively rolled out worldwide, helps to spread the concept of sustainability in a meaningful way.
Suppliers participating in a Supplier Early Payment Program (S.E.P.P.) can – on request and as required – have invoices to their customers paid out before they produce and deliver the goods. This brings the enormous benefit that suppliers can obtain money from the bank as soon as the order is confirmed, and thus precisely when they need to invest heavily in the purchase of materials or the start of production. The expected payment for the agreed order serves as security if the company placing the order has a sufficiently high credit rating. The customer and supplier only negotiate the price of the goods, while the lending bank negotiates the conditions for early payment with the suppliers.
Kai Gloystein, Vice President Corporate Finance and Treasury, emphasizes how linking the financing and sustainability strategies boosts the credibility of sustainable activities: “When it comes to financing, only solid data counts, and that’s a good thing. In this way, we can clearly state and demonstrate our serious efforts in the area of sustainability. This sends a clear signal to the capital market and external stakeholders, but also within our company. In our collaboration with banks, as well as our discussions with other companies, we are seeing how interest in sustainability-linked forms of financing is steadily growing, making these financing options increasingly relevant. We are already broadly positioned in this area and can see how investors are sharpening their focus on it.”
In our collaboration with banks, as well as our discussions with other companies, we are seeing how interest in sustainability-linked forms of financing is steadily growing, making these financing options increasingly relevant. We are already broadly positioned in this area and can see how investors are sharpening their focus on it.
Kai Gloystein – Vice President Corporate Finance and Treasury at Knorr-Bremse AG
Only a high degree of transparency can build trust. Knorr-Bremse has therefore drawn up its own Sustainability-Linked Bond Framework with specific measurable targets for existing and future sustainability-related financing instruments.
The Sustainability-Linked Bond Framework describes in detail two key performance indicators (KPIs) that are both highly relevant to Knorr-Bremse’s sustainability strategy and support the global political objectives and action plans of the United Nations and the European Union, for example. Existing or future sustainability-linked financing activities of Knorr-Bremse are tied to at least one of these KPIs.
The Knorr-Bremse Climate Strategy 2030 aims to reduce both direct CO₂e emissions from the company’s own emission sources (Scope 1¹) and indirect CO₂e emissions from the generation of procured energy (Scope 2²) at Knorr-Bremse locations by 75% by 2030, based on 2018 levels.
All other indirect emissions along the value chain (Scope 3 emissions³) account for the largest share of CO₂e emissions at Knorr-Bremse, as they do at our competitors. The goal: to reduce Scope 3 greenhouse gas emissions from purchased goods and services, upstream transportation and distribution, and the use of sold products by 25% by 2030, based on 2021 levels.
In this way, Knorr-Bremse also plays a key role in introducing effective measures for greater sustainability in the upstream and downstream value chain.
The credit rating agency S&P Global Ratings, as an independent body, has thoroughly examined the framework developed by Knorr-Bremse and published a positive Second Party Opinion. Notably, the agency rates the second chosen KPI, which relates to Scope 3 emissions, as “Advanced”, as well as the planned extensive reporting process.
The sustainability targets formulated in the framework are also in line with the 2015 Paris Climate Agreement, which aims to limit the global average temperature rise to well below 2°C and pursue efforts to limit it to 1.5°C. This was confirmed in July 2023 by the independent Science Based Targets initiative (SBTi) .
“The tasks we need to accomplish to reach our sustainability goals are challenging and complex to implement. With our products, the mindset for innovation within the company and the broad expertise of our employees, we are determined to take a pioneering role in sustainability and green mobility for our customers. To achieve this, however, all processes must be efficiently interconnected and implemented in partnership with our customers along the value chain,” explains Marcus Hoffmann, Vice President ESG. He therefore considers it essential to maintain a coherent organizational structure and define clear areas of responsibility in order to achieve the targets. “Thanks to the ESG Board, a number of (cross-)divisional meetings and regional exchange platforms, we have the decision-makers on board and we coordinate the targets, the measures and our progress – across departments and divisions. Equally essential is that we take all our colleagues with us on this journey, identify the key sustainability issues, show how these will present significant risks in the near future, but also opportunities, and how each individual can play their part to ensure that Knorr-Bremse maintains its strong position.”
With our products, the mindset for innovation within the company and the broad expertise of our employees, we are determined to take a pioneering role in sustainability and green mobility for our customers. To achieve this, however, all processes must be efficiently interconnected and implemented in partnership with our customers along the value chain.
Marcus Hoffmann – Vice President ESG at Knorr-Bremse AG
In order to consistently address the sustainability topics relevant to Knorr-Bremse and to reflect the growing demands of customers, investors and other stakeholders, 14 core strategic sustainability topics have been defined along with associated milestones. These are driven forward at the operational level by the relevant specialist departments, with centralized technical support and coordination from the Sustainability department.
ESG Board meetings are held regularly to discuss and agree on decisions and procedures at the highest management level. Naturally, the defined topics are regularly reviewed in light of changing customer requirements or regulations. The committee thus maintains an overview of progress on all current and upcoming measures and aligns their direction and implementation with the overall business strategy.
“This is how we ensure our integrated approach to sustainability across all levels,” emphasizes Frank Markus Weber, who is convinced that sustainability-linked financing will continue to move into the mainstream in the future. “There is a lot of potential here. We all need to use every lever available to reconcile climate protection and business objectives as effectively as possible.”
¹ Scope 1: direct CO2e emissions from energy sources at the company locations; this also includes emissions from the company's own vehicle fleet.
² Scope 2: indirect emissions from the consumption of procured energy at the company/production sites
³ Scope 3: all other indirect emissions that arise along the value chain, e.g. from the purchase of goods and services, from the upstream chain for energy generation, from transport from suppliers, from business trips, employee commuting and also the use of sold products