The rise of ESG investing
Complying with environmental, social and governance standards could mean significant savings when it comes to financing projects related to lithium, a key component of electric car batteries.
That’s because companies adhering to those measures can attract commercial banks looking to provide funding for ESG-aligned projects instead of relying on private lenders or specialty credit mining funds, said Ana Cabral-Gardner, chief strategy officer at Sigma Lithium Resources Corp., a Canada-listed mineral exploration firm that has operations in Brazil.
“What ESG is doing for us is opening the project financing category to Sigma,” Cabral-Gardner, a former Brazil-based investment banker who previously worked at Goldman Sachs Group Inc. and Barclays Plc, said in a telephone interview. Other debt financing alternatives for lithium mines are “600 to 1,000 basis points more expensive.”
Project financing through banks could be signed at a spread of 450 to 500 basis points over Libor while other sources such as credit funds would offer a spread of about 950 basis points plus equity incentives, which could add another 400 basis points, she said.
Private lenders or specialized mining finance firms typically demand equity warrants or similar equity-linked incentives on top of interest payments, Cabral-Gardner said. In bank-led project financing, borrowings are guaranteed by the cash flows of the asset, which are ring-fenced from the company’s balance sheet.
Banks worldwide have committed to the mobilization of trillions of dollars to help address climate change and other ESG-eligible uses. In Canada alone, the country’s largest banks plan to bring $600 billion in funding for sustainable projects over the coming years.
“We have received enormous attention from banks that do have ESG as a key principle,” said Cabral-Gardner, who is managing negotiations with at least four banks including one Brazilian and one Japanese lender. Sigma Lithium Resources is aiming to sign off on financing for a specific project by the end of March, she said.
The company is looking to build a commercial production plant in Brazil, where it has been running a pilot project for over a year. Sigma is also providing lenders business projections alongside the plant’s ESG credentials, said Cabral-Gardner.