November 13, 2019
Italian-based power producer Enel S.p.A. recently raised $1.5 billion and €2.5 billion in two bond issues that would require the company to raise its coupon if it falls short of achieving its higher sustainability commitments.
Already a leader in environmentally sustainable production, Enel's existing capacity from renewable sources is at 45.9%. But if Enel falls short of raising that percentage to its 55% target by year-end 2021, as monitored by an outside auditor, the coupon rises by 25 basis points. On one of the tranches sold to European investors, Enel also linked the coupon to a commitment to reduce direct CO2 emissions by 70% by year-end 2030.
J.P. Morgan was among the leading international banks that marketed the world's first general purpose bond linked to meeting the United Nations' Sustainable Development Goals (SDG). Adopted in 2015 by the U.N.'s members, the SDG is a set of 17 comprehensive goals, "a call to action by all countries to promote prosperity while protecting the planet." In keeping with those overarching objectives of the SDG, the Enel bonds are aimed at promoting Enel's commitment to "affordable and clean energy," along with "sustainable cities and communities" and reducing carbon dioxide emissions, with an eye to completely eliminating them by 2050.
Michele Cortiula, in Debt Capital Markets based in London, said the bond met with positive investor response. "Being the first issue of its kind," Cortiula said, "J.P. Morgan participated in extensive investor work to explain its terms and how the utility's capacity target would be measured." The issue was described in a series of non-deal roadshows followed by marketing calls conducted in September and October.
Marilyn Ceci, who heads the firm's Green Bond financings, said the Enel transaction is a complementary approach to Green Bonds in terms of pursuing environmental initiatives. Detailing the distinction, she said Green Bonds raise capital for specific environmentally beneficial projects, such as installing energy efficient heating and cooling equipment for a large commercial complex, or by constructing an individual wind farm that will reduce fossil fuel consumption and greenhouse gases.
"In this case," she said, "the bond's proceeds will be used for general corporate purposes, but the issuer is committing to paying a higher coupon if it doesn't achieve a measurable gain in its percentage of renewable energy capacity by the end of 2021. Essentially, the company is committing to penalizing itself if it misses its environmental target."
Reaching the 55% target, according to Ceci and Cortiula, will come from a mix of increasing the utility's contributions from such renewable sources as solar and wind, as well as by reducing the proportion of its installed capacity from coal, oil and other fossil-fuel energy generators. They credited the company for its approach to reducing fossil-fuel generating capacity and the emphasis it places on lowering its output of carbon dioxide.
“By penalizing itself if it fails to reach a renewable capacity of 55%, Enel effectively has skin in the game," Ceci explained, which was a draw for investors. Because of the overwhelming demand, the issue was able to be priced aggressively, lowering Enel's financing costs.
While this issue for Enel was the first of its kind, Ceci and Cortiula see it as being a harbinger for other transactions. According to the recent Global Sustainable Investment Review, the asset base reached $31 trillion in 2018, a 34% increase over the 2016 level. Europe accounts for the largest pool of sustainable assets, $14 trillion, with the U.S. close behind at $12 trillion.
"Just as with Green Bonds, which continue to experience significant growth rates, up 53% since last year, SDG-linked transactions are another instrument for issuers to utilize. Both instruments will continue to thrive; they're both very welcome in the market," Ceci added. "In Enel's case, this is one way an issuer with a very aggressive sustainability approach can demonstrate how the resources of an entire institution can be applied toward meeting its objectives."
There is strong support across global regions for environmentally-linked financings, both in Green Bonds and SDG, but Europe is in the lead as of now because of governmental encouragement for pursuing such remedies in support of reducing greenhouse gases, Ceci said.
JPMorgan Chase is committed to advancing sustainable solutions for its clients and its own operations. By end of year 2018, the firm had facilitated over $100 billion in clean financing as part of its goal to reach $200 billion by 2025.
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