ENEL, an Italian
international energy group, has launched an innovative USD benchmark bond
called an SDG linked bond. The terms and conditions of the five-year instrument
include a key performance indicator (KPI) which Enel commits to achieving for
investors by 2021: the increase of its renewable energy installed capacity to
at least 55% (from 46% as of H1 2019) of total capacity.
How does it work?There is a one-time
review of the KPI at the end of 2021, at which time, should the objective not
be achieved, there can be an increase in the coupon – the annual interest
payment to bondholders – of 25 basis points. The
review is carried out as part of the annual audit by Ernst & Young (EY).
Unlike green bonds, the funds raised with this transaction are not tagged to a specific use of proceeds. In this sense the bond is similar to a sustainability-linked loan (SLL), for which the interest rate can move up or down depending on performance relative to a KPI. However, this is the first time that such a mechanism has been used for a bond.
Why is ENEL issuing this bond?ENEL has already issued
several green bonds. This Sustainable Development Goals (SDG)-linked bond aims to provide transparency
for investors on the evolution of its entire business model to address the
energy transition rather than focusing on specific projects it aims to finance.
Most interestingly, the company is allowing investors to hold it accountable
for this strategy via the coupon ‘step-up’.
More broadly, this leads the way to a new product for the sustainable finance market where other bond issuers can follow.
How exactly is the bond linked to the SDGs?ENEL’s efforts to
enhance renewable energy capacity allows it to address several environmental and social SDGs: SDG 7 – affordable and clean energy, SDG 13 – climate action, SDG 4 – quality
education, and SDG 8 – a decent right to work. It is important to note that
efforts in the energy transition must work within the concept of the “just”
transition – which means they improve the quality of life and employment for
those benefiting from that energy, and also those involved in its generation.
BNP Paribas was a joint bookrunner for the deal along with Bank of America Merrill Lynch, Citi, Credit Agricole CIB, Goldman Sachs, JP Morgan, Morgan Stanley and Societe Generale.