Enel SpA's recent issuance of a $1.5 billion general-purpose sustainability-related bond signals another evolution of the related debt finance market that emphasizes a company's overall trajectory instead of project-specific green investments, according to analysts and market experts.
The Italian utility on Sept. 6 announced it had issued the bond and included the potential for the bond rate to increase one time if the utility fails to meet a future renewables expansion target. But unlike green bonds, in which the issuer pledges to use the proceeds toward existing or new green projects such as renewable generation or energy efficiency, Enel can use the cash from its new bond for anything.
While green bonds continue to dominate the sustainable debt finance market, additional mechanisms to promote environmental or broader sustainable targets have emerged in recent years. One such product is a sustainability-linked loan in which the company's rate goes up or down based on such things as that company's sustainability score or its ability to reduce its emissions. Similarly, social impact bonds have also emerged to enable government agencies to raise funds for new and existing projects that advance social objectives such as helping U.S. military veterans who are suffering from post-traumatic stress find long-term jobs.
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Enel's new bond appears to be the latest iteration of that evolution, said analysts and market experts.
"We've seen a diversification in the types of products in the sustainable finance space that are being offered," said Moody's Investors Service green bonds analyst Matt Kuchtyak. Helping to drive that evolution are investors who "are increasingly looking at how individual green bond or social bond investments are being tied to what the issuer is doing overall from an [environmental, social and governance, or ESG] or sustainability-perspective."
Corinne Bendersky from S&P Global Ratings' sustainable finance team attributed investors' changing expectations regarding sustainable finance products to the broader ESG movement.
"ESG has really reached the mainstream and now we're continuing to see pressure mount across the financial system and across the corporations to demonstrate how they're contributing to improving sustainability outcomes," Bendersky said.
Instead of financing or refinancing specific projects, Enel has tied the bond to its overarching plan to advance four of the United Nation's sustainable development goals, or SDGs, in the areas of affordable and clean energy, industrial innovation and infrastructure development, sustainable cities and communities, and tackling climate change.
Pursuing those four SDGs will account for more than 90% of the utility's capital spending and to generate more than 90% of value in terms of earnings before interest and tax, or EBIT, for the period of 2019 to 2021, the company said.
Experts indicated SDG-related efforts are cropping up more frequently now in the sustainable-investing space. "SDGs are becoming an important framework for understanding how the investment and corporate world is contributing to the overall global system," Bendersky said.
For its part, Enel in documents suggested the oversubscription of its bond "confirms the appreciation of the financial markets for the soundness of the group’s sustainability strategy and the consequent impact on the economic and financial results, with a financial strategy increasingly characterized by sustainable finance." Enel declined requests for additional comment.
Enel's general-purpose bond also includes a one-time step-up mechanism that would raise the rate Enel would pay by 25 basis points if it fails to add enough renewable generation to its portfolio by the end of 2021 so that 55% of its total installed capacity is made up of renewables. Renewables accounted for 45.9% of Enel's portfolio at the end of June 2019.
Enel set the 55% renewables by 2021 target in November 2018, well before it issued the bond. But experts and analysts say the rate step-up mechanism in the bond gives Enel a stronger financial incentive to meet the goal.
"I think the market appreciates the strategy and the commitment of Enel in this respect," said Antonio Totaro, director of Fitch Rating’s utilities and transport group for Europe, the Middle East and Africa. He acknowledged that since Enel set the renewables target ahead of issuing the bond means "there's no new meat for the market or for the investors." But at the same time, Enel is "saying we are so committed about meeting (the renewables target), we are ready to risk some cash on top of some reputation," Totaro said.
In addition, Enel has pledged to have an independent third party perform a one-time review for whether it has met its 2021 goal for purposes of the SDG-linked bond.
"What Enel is angling towards is that rather than companies needing to issue green bonds, the company itself should be regarded as a company that is a sustainable company and an environmentally-friendly company and therefore anything that it issues ought to be acceptable to green bond investors," said Moulder.

