Stockholm (NordSIP) – The Italian energy giant Enel issued a €2.5 billion multi-tranche bond linked to the achievement of the United Nations Sustainable Development Goals (SDGs). The transaction is Enel’s first “General Purpose SDG Linked Bond” issued on the European market. It follows the launch of the first-ever SDG-linked bond, a single tranche security worth US$1.5 billion, issued by Enel in September. Enel intends to shift all its green bond issuance onto this new framework.
Demand for this new type of bond shows that investors are keen on sustainability. However, we wonder whether there is any additionality to using this framework to achieve what could green bonds already do in a more transparent and accountable manner through.
The transaction was divided into three tranches tied to SDG7 and SDG13, “Affordable and clean energy” and “Climate action” respectively.
The first and second tranches were linked to SDG7, specifically to achieving the goal that installed renewable generation capacity represent at least 55% of total consolidated installed capacity. As of June 30th, 2019, the figure was already equal to 45.9%.
The third tranche was tied to SDG13, specifically the achievement of a level of greenhouse gas emissions by 2030 equal to or less than 125 g of CO2 per kWh. As of 2018, this figure was already equal to 369 g of CO2 per kWh. These goals are in line with the commitment to reduce Enel’s direct greenhouse gas emissions per kWh by 70% by 2030 compared to the 2017 values, as certified by the Science-Based Targets initiative (SBTi) and consistent with the Paris Agreement on climate change.
The first trance was a €1 billion zero-coupon bond that matures on June 17, 2024, linked to SDG7. The bond was priced at a 99.123 discount, and the effective yield at maturity was 0.189%. The second tranche is a €1 billion bond tied to SDG7 that matures on June 17th, 2027 and pays a 0.375% coupon. The security was priced at a 99.257% discount, and the effective yield at maturity is equal to 0.474%.
For both of these tranches, the interest rate will remain unchanged to maturity subject achieving the aforementioned SDG7-linked target by December 31st, 2021. If that target is not met, a step-up mechanism will be applied, increasing the rate by 25 bps as of the first interest period after the publication of the auditor’s assurance report.
The third tranche was a €500 million bond that matures on October 17th, 2034 linked to SDG 13. The issue was priced at a 98.922% discount, and the effective yield at maturity is equal to 1.204%.
The interest rate will remain unchanged to maturity subject to the achievement of the aforementioned SDG13-linked target by December 31st, 2030. If that target is not met, a step-up mechanism will be applied, increasing the rate by 25 bps as of the first interest period after the publication of the report issued by a third-party expert charged with validating the methodology for measuring CO2 emissions applied by the Group.
According to Enel, demand was strong with “total orders of about €10 billion and significant participation by Socially Responsible Investors (SRIs)”. There were 20 joint bookrunners on this transaction: Banca IMI, Barclays, BBVA, BNP Paribas, BofA Merrill Lynch, CaixaBank, Credit Agricole CIB, Credit Suisse, Deutsche Bank, Goldman Sachs International, HSBC, ING, J.P. Morgan, Mediobanca, Mizuho, MUFG, Natixis, Santander Corporate & Investment Banking, SMBC Nikko and Unicredit.
A New Market but Where is the Additionality?
Enel and the bookrunners on this transaction were optimistic about the new market they created. “After our successful SDG-linked bond placement in the US, we have launched our first-ever sustainable bond on the European market, and the excellent outcome of this issuance is further evidence of the growing appetite of investors for innovative, sustainable financing tools,” said Enel’s CFO, Alberto De Paoli.
Much of the novelty of this transaction seems to be the SDG-linked step-up it includes, which would be “a significant increase in the company’s cost of capital,” according to Hermes’s Mitch Reznick, CFA, Head of Research and Sustainable Fixed Income, and Aaron Hay Lead Engager, SDG Engagement High Yield Credit. “The coupons across the four tranches range from zero on the euro-denominated 2024 maturity to 2.65% on the dollar-denominated 2024 maturity.”
However, not everyone was so optimistic about this new formula. The 25bps step-up is supposed to serve as an incentive for the issuer to comply with its goals, but it is not clear how much of a bite this carries. Sustainable investors have been quoted arguing that the focus on the step-up is misplaced. What investors are looking for is the impact that their fixed-income investment has. What matters is the carrot, i.e., the sustainability report.
Moreover, given the greenness of the two SDGs targetted by Enel on this transaction, one wonders why the energy giant decided not to issue a regular green bond. Green bond frameworks are established, supported by an experienced and transparent industry of green bond rating agencies and reviewers such as CICERO and Sustainalytics and specify in more detail what projects the funds are supposed to be used.
“The vast array of SDG initiatives provides issuers with many opportunities to link so-called use of proceeds bonds to a number of sustainability efforts,” PIMCO’s Mike Amey wrote in a NordSIP report published in November 2018. It seems like a missed opportunity to use SDG-linked bonds to fund the achievement of targets on climate change and energy that Enel is already committed to, and that can be achieved through existing green bonds. It seems like this SDG-linked bond lacks in additionality.