September 12, 2019

Breakingviews: Climate-linked debt’s influence starts to spread

by Breakingviews.

The climate just got better for sustainability debt. Italian utility Enel last week sold $1.5 billion of bonds that pay a higher interest rate if the company misses green-energy goals. So far, so 2017: That’s when ING introduced sustainability improvement loans, which have a similar feature. The innovation in the latest deal is that Enel can use the cash for anything.

Most traditional bond documents state that the money raised will be spent on “general corporate purposes.” Although investors usually get more information from issuers, they essentially have to take companies at their word.

That didn’t cut it when institutions began developing financing instruments to reduce or mitigate global warming or promote one or more of the United Nations’ 17 Sustainable Development Goals. These usually set out specific uses for the cash, and give bondholders more information than usual to ensure borrowers stick to the agreement. Trouble is, it’s not always possible or relevant for companies to tie the debt to specific assets, and even when it is that can increase the cost of borrowing.

Enel’s take on the SDG bond offers a handy workaround. The power company will have more flexibility to use the money as it sees fit, but it will still be held to account. If it fails to meet a target of boosting renewable energy to at least 55% of its installed power generation capacity by the end of 2021, it will pay an extra quarter percentage point in interest on the bonds.

The United Nations Global Compact, which works with companies to promote the SDGs and advised Enel on the debt issue, believes structures like this can help fill a $3 trillion-a-year financing gap needed to hit the development goals set by the UN in 2015.

Enel is a good poster child to use. It has already issued three green bonds and Chief Executive Francesco Starace has increased its installed green-power capacity to some 46%.

As more issuers adopt the structure, though, bondholders should demand tougher penalties. Missing its goal would cost Enel less than $4 million a year in extra interest. That’s barely a rounding error. Bigger rate penalties, forcing flunkers to buy back their bonds and even tying executive pay to progress would more properly hold companies’ feet to the climate fire.


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