In their latest insight, Mitch Reznick, CFA, Head of Credit Research and Sustainable Fixed Income, and Aaron Hay, Engagement Professional, at Hermes Investment Management, look at how an Italian energy company’s new bond marks a defining moment in the evolution of sustainable fixed-income markets.
On 5 September, Italian energy firm Enel priced a single-tranche dollar-denominated bond to raise $1.5bn for general corporate purposes. The order book was four times oversubscribed. On 10 October, Enel priced an additional €2.5bn bond that consisted of three tranches.
Given that Enel has a long history of operating in global bond markets, these deals would normally be nothing to write home about. But as the world’s first general-purpose linked to the Sustainable Development Goals (SDGs), they form a milestone in the evolution of sustainable fixed-income investment.
The bonds being aligned with a sustainable theme is not what makes them special. Although the green-bond market is small, it is growing rapidly, and there has been a surge in issuance of other sustainable bonds under labels like ‘blue’, which seek water preservation; ‘social’, which are linked with positive societal impact; and ‘transition’, which support business activities progressing towards a low-carbon economy.
Unlike corporate green bonds, Enel’s general-purpose instruments are not linked to a specific project. Instead, the company has pledged to meet SDG targets or face a punitive jump in interest payments. Put simply, Enel has attached the heart of its business to environmental progress and backed the promise with its own cost of capital. There have indeed been other SDG-labelled issuances in the market, but none that explicitly link the cost of capital to achievement of an externally-focused SDG outcome.
Enel has set two objectives linked to SDGs 7 and 13 (see figure 1). If the firm misses the objectives, an interest step-up option is triggered which lifts the coupon by 25bps.
Figure 1. Key features of Enel's general-purpose SDG-linked bond
SDG |  |  |
|---|---|---|
Interest stop-up option | One-time adjustment of 25bps if the target condition is not satisfied. | One-time adjustment of 25bps if the target condition is not satisfied. |
Threshold condition | Installed renewable capacity to be equal to or exceed 55% by 31 December 2021. | Direct greenhouse-gas emissions to be equal to or below 125 g/k/Wheq2 by 31 December 2030. |
Source: Enel, as at October 2019.
This would be a significant increase in the company’s cost of capital – the coupons across the four tranches range from zero on the euro-denominated 2024 maturity to 2.65% on the dollar-denominated 2024 maturity.
Enel has also promised to be open and accountable when reporting its progress, promising that when it achieves the SDG 7 target it will provide a “specific assurance report issued by the auditor”.1
As well as setting a new standard in the sustainable bond market, the issues give credence to the role of SDGs in the investment world. The SDGs were directly referenced when the bonds were marketed and are also reflected in the step-up mechanism. The SDGs are increasingly being used as a framework through which market participants can articulate, measure and report efforts to improve their impact on society and the environment through investing.
Enel has shown others how to turn the SDGs into powerful investment tools. We believe that establishing such precedents is an increasingly important way to further the development of sustainable investment.
Furthermore, the SDGs are a call to action: the goals can mobilise private capital to work alongside funding from governments and development institutions to solve some of the world’s most urgent environmental and social problems. Enel clearly acknowledges this, stating that:
“Companies and governments must be ready to lead the change by setting challenging targets and developing flexible strategies… Companies will be expected to serve as an example of worldwide best practices and are a fundamental part of the solution to the equation that “Sustainability is Value Creation”.2
We believe that the issuance reflects how finance has pivoted towards an understanding that market participants – companies, governments, investors, rating agencies and regulators – must embrace their responsibility to all stakeholders, including employees, the environment and society.
Enel believes that its commitment does not prevent it from delivering strong financial returns and argues that ‘Sustainability and value creation are not mutually exclusive. If you plan and act for Sustainability, you generate value by means of superior performance’.3
Investing with an eye on environmental, social and governance factors does not detract from financial returns. Indeed, our proprietary research shows that it can even enhance them. We applaud Enel’s move and will closely watch further developments in sustainable-bond issuance.
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1 “Enel launches the world’s first “general purpose SDG-linked bond”, successfully placing a 1.5 billion US dollar bond on the US market’, published by Enel on 6 September 2019.
2 “Enel’s general purpose SDG linked bond, context and principles,” published by Enel on 4 September 2019.
3 Ibid.
