Verbund: strategic pioneer
With a host of landmark transactions that include the world’s first sustainability-linked loan and the world’s first green digital Schuldschein, Verbund stands out as a pioneering issuer of ESG debt. Most recently, it broke significant new ground by combining normally separate green use of bond proceeds with a sustainability-linked coupon.
“We have always tried to be at the forefront of developments, to be ahead of the curve,” says Peter Kollmann, chief financial officer at Austrian utility Verbund. “It is a track record where step-by-step we tried to push the envelope, to be brave and be the first one with new structures.”
This leadership in sustainable finance reflects what Kollmann terms Verbund’s corporate DNA. “Sustainability has been a core element of our strategy for many years,” he notes, citing the company’s production of CO2-free electricity for decades. “Our first hydro power plant was built in the 1950s. Today we’re one of the largest hydro generation companies in Europe.”
Reaping the benefits
Verbund identifies two key benefits from its sustainable financing. The first is that it aids the company’s efforts to articulate its values. “It supports us in communicating, externally but also internally, what we stand for as a business,” says Kollmann. “I think it is a tool to be very clear in terms of how serious sustainability has been for us — not just in the past or the present, but definitely looking into the future.”
The second is pricing. As so-called ‘greeniums’ have grown more pronounced on ESG debt, the company has reaped the benefit of having established a track record with buyers.
“We get a lot of investor demand,” says Kollmann. “We see that there is a loyalty developing from our investor base, who want to own Verbund paper. They are very keen to come in with very large orders, they want a big allocation and, because of that credibility and those loyal investors, we are able to have a real price advantage through our structures.”
More generally, Kollmann — a fan of Mark Twain — cites the writer’s famous aphorism that “it’s never wrong to do the right thing”.
At the same time, the company also acknowledges that issuers must overcome challenges in building a presence in sustainable finance. Credibility is one. This requires the financing strategy “to be fully integrated and synchronised with the strategy of the company,” Kollmann believes.
“It cannot be a highly sophisticated finance department working in an ivory tower and producing clean instruments. You need a lot of input from people outside the finance department. It needs to be part of the organisation and part of the thinking.”
This requires articulating the case effectively to the company’s internal audience, Kollmann notes. “So that your own people all understand why this is important and why you want to make a contribution — not just to your own company, but to the entire market.”
Senior management’s support also plays a key role. “You need a lot of support, and there leadership is very important,” he adds.
Termed “super green bonds” by some investors, Verbund’s most recent ESG debt offering stands out as a new sustainable finance landmark. The 20 year deal meshes a dedicated use-of-proceeds standard in green bonds with the newer sustainability-linked bond (SLB) coupon structure.
SLBs usually compensate investors if the issuer fails to meet the targets embedded in the instrument by increasing their coupon — often through a 0.25% step-up.
“When we started with the planning six months ago, we thought ‘what would be a structure that really combines a lot of different features — and is that something that is do-able?’” Kollmann recalls. “During the construction process we realised that if it is well received by investors, it could indeed be ground-breaking because it covers so many different elements which are very important for sustainability.”
Verbund incorporated two targets that both it and investors regard as important. The first was that it must add at least 2,000MW hydropower, wind power and photovoltaic (PV) solar renewable energy production capacity by the end of 2032.
Determined in conjunction with Verbund’s 100%-owned subsidiary Austrian Power Grid, the second highlighted the need for renewable energy to be integrated into countries’ high voltage grids. It requires the company to install additional transformer capacity of at least 12,000 MVA to facilitate interaction with the grid — also by the end of 2032.
In addition, the structure is fully aligned with the new EU taxonomy for sustainable activities. This reassured buyers about its compatibility with the EU’s criteria — a new benchmark for the greenest investments.
It was also targeted to dedicated sustainable investors. Indeed, since the €500m deal was subscribed more than four times over, Verbund was able to allocate all of the bonds to signatories of the UN-supported Principles for Responsible Investment.
The structure is likely to provide Verbund’s default financing format in future, Kollmann believes. “It should definitely be the role model. A lot of investors feel that it could well be one of the innovations that will really make a difference.”
The company also hopes that peers will make use of it too. “A lot of people will follow, though perhaps not with all four features. But for similar entities we could well see it being a future part of capital markets,” Kollmann judges.
Verbund still sees scope to continue innovating in sustainable finance. Kollmann laughingly dismisses the idea that it may have exhausted potential for this: “I hope not! I really hope we can continue to be a leader in innovation and I actually am very positive.”
He emphasises that the company “is not interested in gimmicks”. Rather, “we want the features which we introduce in our financing to be fully understood and for our investors to really recognise the value of those features.”GC