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​Investors welcome new corporate green debt structure

Investors responded favourably to a new type of environment-linked bond as Italian energy giant Enel became the first corporate to issue a euro-denominated bond with a coupon linked to sustainability objectives.

The bond, which was split into three tranches, was sized at €2.5bn and was four times oversubscribed with orders totalling around €10bn, the electricity company reported last week. It said there was “significant participation” by socially responsible investors. 

The bonds feature a coupon that is linked to two of the UN’s Sustainable Development Goals (SDGs). A step-up clause means that if Enel fails to meet the stated target for the given tranche, investors receive 0.25% extra interest. 

The SDGs the bond links to are goal number seven (affordable and clean energy) and 13 (climate action). This is the same as for the dollar-denominated version of the new “general purpose SDG-linked bond” that Enel issued in September — the first of its kind.

Enel, which has already issued three green bonds for a total outstanding amount of €3.5bn, last month said this new financing instrument was better suited to its business than green bonds, which were useful for firms with a segregated sustainable business they wanted to develop.

“For those companies like Enel, instead, where the strategy and business model are clearly sustainable, we strongly believe that innovative general corporate purpose financing products which create financial incentives for the company to fulfill its sustainable business model are the best way to progress the evolution of sustainable capital markets,” the company said.

‘An important evolution’

Joshua Kendall, senior ESG analyst at Insight Investment — which invested in Enel’s SDG-linked euro issue — said his firm gave Enel’s bond a green rating under its scorecard, a model it developed for evaluating what the asset manager calls impact bond issuance.

“We recognise the importance of aligning business sustainability strategy with financing and this bond helps Enel to achieve it,” he said.

Even though there was no single project directly targeted by this bond, unlike conventional green bonds, Kendall said the way it had been structured, with coupon steps, meant it would gradually help shift Enel over time to a more sustainable business.

“We therefore regard it as an important evolution in the market,” he said.

In Denmark, academics pension fund MP Pension was positive about the new debt format when asked about it by IPE. 

Pernille Jessen, head of fixed income at the pension fund’s subsidiary MP Investment Management, said MP Pension has earmarked part of its portfolio to focus on climate-linked opportunities including green bonds.

“It is fundamentally positive and also warranted that issuers like Enel are making an effort to be innovative in order to enhance this agenda”

Pernille Jessen, head of fixed income at MP Investment Management

“With the amount of financing needed in the endeavour of achieving the SDGs — and the diversity of investors on the global scene — I think it is fundamentally positive and also warranted that issuers like Enel are making an effort to be innovative in order to enhance this agenda,” she said.

She said the size of the step-up in Enel’s SDG bond coupon was noticeable, but not very material.

“It does, however, point to the accountability of the issuer when setting long-term targets,” she added. “A potential financial penalty that would reallocate funds from equity investors to bond investors may prove to be an effective tool to ensure focus is sustained.”

She continued: “While the step-up feature might not be the silver-bullet for promoting the SDG agenda in bond investing, it marks a trend of increased mainstreaming of incorporating SDGs into business plans while acknowledging that bond investors believe it matters,” she said.

APG anchors dollar predecessor

Dutch pension manager APG was an anchor investor in the first deal, investing in the dollar-denominated bonds on behalf of its pension fund clients ABP, bpfBOUW and SPW, and receiving its full $50m (€45m) allocation despite that issue being three times oversubscribed.

APG said that over the previous year, its credit team had worked with parties involved on structuring the transaction, and that Enel hoped the bond concept would catch on in the market and encourage other corporate issuance.

“In the future, Enel hopes more of its bonds will contain these types of SDG commitments, perhaps also related to other SDGs,” APG said.

“This way, Enel signals to the investment community that they are a sustainable company and serious about their commitment to advancing the UN SDGs,” it said.

The targets that are integrated into Enel’s new bond issue are: for installed renewable generation capacity to exceed 55% of the total consolidated installed capacity by the end of 2021; and for its greenhouse gas emissions to be equal to or less than 125g of carbon dioxide per kWh by 2030. 

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