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No sector untouched: markets prepare for green transition

The corporate sector is the big one as far as SRI is concerned. It’s where the most energy and climate-rated improvements can be made and where the most capital will be raised. Corporate leaders see sustainability as a value driver, and investors are beginning to agree. As Jon Hay reports, a wave of green bonds could help companies communicate their credentials to the market.

The corporate sector is, so far, the main focus of activity for responsible investors, and for good reason. This is where most of economic life goes on — where the minerals are dug, the oil burnt, the water used up and polluted, and the factories operated, well or badly.

“The green transition is very similar to the internet — there’s not a sector of the economy that isn’t affected by it,” says Timothy Nash, president of Strategic Sustainable Investments, an educational group in Toronto. “There are going to be winners and losers. If you accept the fact that sustainable companies are more profitable, efficient, productive, innovative, then it stands to reason that by investing in them you’ll generate higher returns.”

So far, although they nominally manage a large quantity of assets, responsible investors have only a weak influence on securities prices. But through the soft power of dialogue and sometimes protest, investors can change corporate behaviour.

And forward-looking companies are coming at least half the way to meet them. “Enel believes that ESG issues create competitive differentiation,” says Luca Torchia, head of investor relations at the Rome-based electricity generator. “They distinguish companies that will be market leaders in the future and those thinking short term. We are not only looking toward greater revenue growth and productivity, but also at risk factors that may affect the company down the road.”

Justin Keeble, head of sustainability services for Europe, Africa and Latin America at Accenture, is impatient with a lot of the corporate social responsibility image-polishing companies have done in the past 10 years. “It’s quite tiresome and not value-adding,” he says. “We think sustainability is a huge value opportunity, which will only be delivered by driving real performance.”

Accenture splits the opportunity into four: cost savings through efficient use of resources; risk management; new revenue opportunities such as consumer goods companies launching sustainable products or telecoms applications for green purposes; and intangible brand and reputational value.

Measuring the risks

Of these, risk and brand are harder to quantify than costs and revenue. But in general, the big problem companies are wrestling with, Keeble says, isn’t recognising the scale of the threats and opportunities — they’ve done that — but working out how to measure and value them.

The UN Global Compact survey of 1,200 CEOs has shown a rising trend, to over 30%, in the share of CEOs who say they’ve failed in their efforts to link sustainability to business drivers.

As metrics to do this improve, companies are likely to deploy them in support of their investor relations efforts. “One of the initiatives we took this year,” says Carine de Boissezon, senior vice-president of investors and markets at Electricité de France in Paris, “was to make our internal CSR commitments public, with quantitative targets, so investors can see how we are progressing.”

The different facets of sustainability are also self-reinforcing. “The fact that we have an action plan for adaptation to climate change has changed some of the ways we do business,” says Claude Nahon, EDF’s head of sustainable development. “We don’t only aim to have a robust infrastructure, but a resilient one, and we have built a lot of connections with local authorities for crisis management purposes.”

Ultimately, creating a sustainable economy will depend on legislation and international agreements. A global system of progressively tightening carbon rationing with tradable permits would instantly take carbon from the realm of ESG into mainstream financial calculations. 

But in the gaps when the world is waiting for legislation, and to push companies to go beyond legislation, responsible investing could, if it continues to gain momentum, become a powerful force. 

Green bonds for companies

Companies are also now becoming interested in the latest new product to sweep the public sector bond markets: green bonds.

Large sums for green projects have been raised in the capital markets for years. All the windfarms around the coasts and on the hilltops of Europe, for example, have been built with money borrowed, in some cases from banks, but often from bond investors, by large power companies, from SSE in the UK to Germany’s RWE.

Hundreds of bond-issuing companies from General Electric to Siemens make technologies that can save energy or make it greener.

In a very few cases, notably the Californian solar power bonds issued in 2012 and 2013 by Warren Buffett’s MidAmerican Energy, bonds have been issued, backed by a single renewable energy project. Such financings are more commonly loans.

But in the main, companies building sustainable energy infrastructure — like the development banks that issue green bonds — tend to have a broad range of activities, some greener than others.

The idea has therefore appeared of issuing bonds with a close tie to one part of the organisation, so they can be marketed to investors seeking a specifically sustainable investment.

Green investors with an appetite for risk are more likely to seek out the shares or debt of smaller companies developing carbon-efficient technologies, or project bonds like MidAmerican’s $1.1bn of Topaz Solar Farms bonds, rated Baa2/BBB, and its $1bn Solar Star deal, rated Baa3/BBB-. These standalone deals, to finance MidAmerican’s acquisitions of the assets, were rated lower than MidAmerican’s holding company ratings (Baa1/BBB+) or senior debt (Aa3/A).

“Deals like this attract a spectrum of investors, including mainstream investors that are intrigued to get into the solar investment arena,” says Michael Eckhart, head of environmental finance at Citigroup, left lead on the Solar Star deal. “But they are also very appealing to SRI investors.”

However, investors that want safe, conventional investments with a green tinge are attracted by the idea of general obligation bonds from top companies that carry a promise to put the money to a laudable purpose.

Air Liquide first out

So far, only Air Liquide, the French industrial gases group, has issued one. A lot of thought and preparation went into the €500m nine year issue in October 2012, which the company and structurer Crédit Agricole billed as the first corporate SRI bond. 

“We could have issued a regular EMTN as we have done before,” said Fabienne Lecorvaisier, CFO of Air Liquide in Paris, after the launch. “This time we were searching for finance to support two acquisitions in our Home Healthcare segment. We thought it could be a good idea to try to qualify that bond so it could meet the investment criteria of SRI investors.”

In June and July 2012, Air Liquide had bought Spanish and French companies that supply medical oxygen for use at home, for a total of €646m.

“The issue responded to two of our mandates,” said Lecorvaisier. “It reinforced our commitment to sustainable development and diversified our investor base.”

The funds were not ringfenced, but paid for the acquisitions. Air Liquide also engaged specialist ESG rating agency Vigeo to rate the Home Healthcare division, and modified its annual CSR report to inform investors on the division’s ESG performance.

Crédit Agricole, Citigroup, HSBC and Société Générale found €3.2bn of demand for the deal from 230 investors. As with public sector green bonds, it was impossible to demonstrate a pricing advantage from the structure, but some new investors came in, while others gave bigger orders than usual.

The Air Liquide deal provoked great interest among CFOs and treasurers of leading European companies proud of their ESG performance. 

“Corporates are much more interested now to issue those kinds of bonds,” says David Villedieu, head of French corporate fixed income capital markets at Morgan Stanley. “The bonds themselves won’t have any different credit risk, but will be labelled SRI or green to market the efforts made by those issuers. Retail and institutional investors want to dedicate funds to that, and it’s a good way for companies to communicate their values and show investors they are providing a socially responsible investment.”

Green boom?

A couple of corporate deals might come in the fourth quarter of this year, says Giles Hutson, head of corporate banking and DCM for continental Europe at Bank of America Merrill Lynch in London. “The energy and transport sectors are the ones people think about first,” he says.

Bankers say they want to be very careful about the names that come to market at the beginning of the process — they want to be doing green bonds for companies that generally have a good environmental image. 

Julia Hoggett, responsible for EMEA green DCM at BofAML, says the bank’s DCM team have been full of ideas about corporate green bonds, and are talking to a variety of clients about them, adding: “When the market has developed, there are a great number of corporations that this will be relevant to and at the very least it should introduce a greater overall ESG dialogue across all issuers in the bond markets.”

EDF has examined the idea of green bonds. De Boissezon says: “A green bond is a communication tool, but your story has to be really clear otherwise you can lose credibility with investors. It should not be a box-ticking exercise, but a way to highlight what you have done on sustainability.” 

Companies that have invested billions in energy-saving or risk-reducing technologies quite like the thought of getting credit for it.

Villedieu at Morgan Stanley warns that: “It is always difficult to segregate funds because a company’s life is not smooth and predictable. There is probably going to be a variety of structures and approaches used.”

As with the public sector green bonds, themed issues by highly rated companies will not yield any pricing or substantial funding advantage to the issuer, except some investor diversification. They will not bring new green infrastructure or technology into being.

But they could further stimulate interest in ESG and sustainability among issuers, investors — and banks. That could mean more capital is ready to be deployed when more challenging standalone green credits come to market, such as project bonds like MidAmerican’s.

Further out, the world is going to face the real challenge of sustainability: when the scale and speed of change required to avoid disastrous global warming become accepted by all. 

At that point, hundreds of billions will have to be invested in clean energy and climate mitigation measures. The more markets can prepare themselves for that moment, the better.

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