Experts are predicting that sustainability-linked bond (SLB) investors will receive the market’s largest ever step-up payment, as Enel risks not meeting its emissions targets.
The Italian energy company is the world’s largest issuer of SLBs, but analysis from think-tank the Anthropocene Fixed Income Institute shows “it is highly unlikely that Enel will achieve its sustainability performance target at the end of 2023”.
Josephine Richardson, author of the research note published today, was keen to stress that Enel was not responsible for the potential shortfall, and should be praised for adopting targets that wouldn’t inevitably be met – one of the biggest criticisms of SLB issuers more generally.
“The invasion of Ukraine has left European governments unwilling to transition to gas, and so extended the life of coal generation assets,” said Anthropocene’s head of portfolio strategy. “This should not be viewed as a shift in sustainability strategy from Enel, but rather a bump in the road driven by exogenous factors.”
Enel has issued 30 SLBs since 2019, incorporating a variety of green targets. It has already met those relating to renewable energy installations, which apply to four deals.
But the firm also has 10 bonds with coupons tied to carbon intensity. Enel must meet these targets by the end of the year, or pay a 0.25% step-up to investors.
However, government policy decisions as a result of the war in Ukraine have prevented Enel from shifting its assets from coal to gas, hindering the chances of achieving the goal.
Only two other SLB issuers have missed sustainability targets so far. Greek utility PPC was subject to similar energy policy adjustments; and Polish oil refiner Orlen’s bonds were tied to an ESG rating that was downgraded.
Anthropocene calculated that the cost to Enel of missing the carbon intensity targets would be $27m in the first year.
“This makes this the most material observation date for the SLB market to-date,” said the note.
Previous research on PPC’s bond found that its failure to meet the sustainability target, and consequent payment of a step-up, had not affected the performance of the notes in the market.
However, Richardson told IPE, investors are not factoring in the nuances around step-ups in the SLB space.
“The step-up is a kind of hedge. So if the company becomes less attractive from a credit perspective because it fails to demonstrate that it’s becoming more sustainable, the step-up offers protection from any associated poor bond performance.”
But, she continued: “Sustainability sits at issuer level, so whatever a company does will affect every bond equally. The only difference is that some bonds will pay a step-up and some won’t. And I think the market has overlooked the fact that, even within the SLBs space itself, bonds can be very different, and some will be more likely to provide that step-up than others.”
Enel has been contacted for comment.