Funding & Investing

Leading companies chart their green bond progress

Published: Jan 2021

Treasury teams contemplating green issuance can emulate innovation at companies like Enel and Novartis which have recently structured step-up bonds that pay investors more if the companies don’t meet sustainability targets. Elsewhere, Daimler recounts its first step into the market.

Corporate treasury teams can no longer ignore the pressure to issue green debt and use the proceeds for sustainable endeavour. The green bond market is still only a fraction of the total debt capital market but has grown from almost nothing a decade ago to roughly €660bn today and is forecast to hit €2trn by the end of 2023, according to research by NN Investment Partners.

Issuing green debt allows treasury teams to tap a growing pool of investor demand as pension funds and asset managers increasingly seek to integrate ESG across their portfolios and position for economies turning carbon neutral and aligning with the Paris goals. The latest innovation around pricing in the evolving market is allowing treasury teams to tap diversified and sticky investors and cheapen their cost of borrowing, while green issuance is also a powerful communication tool, boosting corporate brands amongst key stakeholders. It is more time-consuming than traditional corporate issuance and involves collaboration across the company as well as long conversations with banking partners that go beyond simple distribution. But the rewards, in every sense, are worth it.

The sustainable debt market took a significant leap forward in 2019 when Italian energy giant Enel, already a renowned issuer of green debt, put together the first ever Sustainable Development Goal (SDG) linked step-up bond. In the innovative structure the cost of borrowing rises if the company fails to meet key KPIs around the UN’s Sustainable Development Goals. The concept is a leap for treasury teams contemplating green issuance for the first time, but Alessandro Canta, Enel’s Head of Finance and Insurance at Enel, passionately believes others can follow.


Enel’s journey only began in earnest in 2016. It started with key commitments like a board-level pledge for the company to become a benchmark in the green bond market. A Green Bond Framework, where the company outlined how it would use green proceeds in line with the 2018 Capital Markets Association Green Bond Principles followed. Elsewhere, Enel set up a new Green Bond Committee to internally track the use of proceeds and impact from its green debt issuance. “We wanted to get the governance, framework and procedures to attract investors right,” recalls Canta, who says raising money was never the priority of the process.

These early steps became bolder following the company’s pledge to help achieve the United Nations SDGs like combating climate change, building sustainable cities and fostering inclusive economic growth. Linking the company’s financing strategy to these overarching goals and seeking investment to finance this broad SDG strategy rather than a subset of projects linked to traditional green bond issuance, was an obvious evolution. “We started to ask ourselves if there was another thing other than green bonds that would fit with this objective,” says Canta.

Developing the concept and product internally took months. “There is a certain amount of reputational risk with creating a new instrument; we had to check the validity of the idea,” he says. Once the board was comfortable with the concept internally, the team started to consult its banks and corporate peers in the UN Global Compact, the voluntary corporate sustainability initiative. Roadshows with US investors ahead of the company’s inaugural SDG-linked five-year US$1.5bn bond followed. “We chose US investors over European counterparts for our first SDG-linked bond because they have a reputation for being more receptive to new ideas. The traditional green bond market is more established in Europe – there is more of a legacy, and this was a new idea.” It wasn’t long until a euro-denominated issue for European investors followed, however.


KPIs and a so-called step-up lie at the heart of the bond structure. KPIs decree Enel achieve at least 55% of its total electricity capacity from renewable sources by the end of 2021 compared to 46% as of 30th June 2019. Enel’s auditor will gauge performance during its annual audit and if the company misses the target, its annual interest payment will step up by 25 basis points offering a reward to investors.

Daniel Weiss, Deputy Group Treasurer at pharmaceutical giant Novartis, which became the second corporate to follow Enel’s lead when it issued a sustainable bond with a coupon step-up in September 2020, agrees that robust KPIs were crucial in attracting investor interest to its €1.85bn issue. Interest payments rise if the company fails to expand access to medicines and programmes to combat malaria, leprosy, sickle cell disease and chagas in a number of developing countries in a KPI structure that took six months to shape and drew on ICMA guidelines on sustainable bond principles.

The value of sustainability

Success doesn’t only depend on ensuring a robust KPI. Enel, selling the concept for the first time back in 2019, had to convince market participants that the company deserved a lower cost of funding if it meets its KPI because sustainability has a value. “Meeting our KPI makes the company more resilient, profitable and less risky in the long term. If you can prove all these things, then we deserve a lower cost of debt. If we don’t respect the KPI we are less sustainable, riskier and investors deserve a premium.”

Weiss, however, remains cautious of the ability of sustainable companies to attract cheaper funding, given that highly rated companies in leading industries can already price bonds at very attractive levels. “Incremental pricing improvements are hard at these levels and the pricing was probably more or less the same, but this wasn’t our primary goal.”

Indeed, a key aim for all corporates venturing into the green debt market is attracting a wider investor base. Ambitious sustainable issuance allows companies to tap the fast-growing cohort of ESG investors. “Our investor base in this bond is slightly different from the investors we usually see in our bond issues,” confirms Wiess, who counsels others that his team relied more than usual on banking partner J.P. Morgan to help shape key elements of the bond to meet investor appetite. “The market is not established, and we relied on the bank more than we do for our other issues.”

These sentiments are echoed by German car maker Daimler’s Head of Treasury Kurt Schäfer, whose team (working with Swedish bank SEB) sold the company’s first €1bn traditional green bond in September in anticipation of a sharp pick up in investor appetite for green debt. “We expect increasing interest in green financing in Europe backed by the EU Green Deal, the changing regulatory landscape and the recent issuance of a green bond by the German government. We expect green financing to become mainstream and indispensable mid- to long term.”

For Enel, marketing the step-up concept for the first time, convincing rounds of investor panels, conferences and bank syndicate desks of its merits was a longer haul, particularly given the debt market still lags the equity market’s appreciation and engagement on sustainability. However, Canta argues, the process is testimony to how the green bond market is evolving to combat the dangers of corporate greenwashing and that investors are increasingly driving the conversation.

During capital rounds treasury teams and their advisers are asking for cash. It forces corporates to listen to investor feedback, adapt their strategies and make green promises. “We had in-depth conversations with banks’ sustainability teams to explain the company’s commitment to the SDGs and the story around the KPI. We needed them on board,” says Canta, adding that European debt investors are a particularly tough nut to crack. “We had one gruelling investor meeting with a very skilled sustainable team. It lasted over an hour and a half with challenging questions about our numbers and approach. They did invest.”

Investor demand

Breakthroughs came when Enel convinced banks that its SDG-linked bond wasn’t a one-off, tailor- made issue but represented a new asset class to help sustainability go mainstream. The fact that green bonds still only account for 2-3% of the global capital markets underscores the urgent need to funnel more money into sustainable endeavour, says Canta who stresses that SDG-linked bonds and new step-up coupons complement the existing green bond market and should not be viewed as a competing instrument. “We were always convinced this instrument had the possibility to become an asset class. Now other companies have followed us, the ICMA has issued principles and the European Central Bank has finally recognised this instrument universally as an asset class,” he says.

Canta also notes that investor enthusiasm for the structure spiked when they saw the issue in the context of Enel’s wider sustainable strategy. It’s a point Samantha Sutcliffe, Head of Green and Sustainable Finance at UBS echoes, pointing to the growing investor enthusiasm for corporate transition stories. “Investors are keen to support companies that are not necessarily 100% green today but have a decarbonisation strategy beyond business as usual in place.”


As for advice to others considering more complex green structures, treasury experts counsel on the importance of setting up a high-level corporate-wide team to knit the process together. At Novartis, alignment between the internal and external legal teams to ensure the language was clear in the bond prospectus around how the coupon step is tied to the KPI was a priority. “We had to align the whole organisation to stand behind those KPIs. It’s substantially different from the usual bond and takes time to put in place,” says Weiss.

Similarly, Sutcliff highlights the new and often hidden benefits of corporate treasury teams working much more closely with their sister sustainability departments. “Green bonds are a vehicle to enhance internal discussions,” she says. “Such cross-department discussions can lead to strategies being revised and targets changed or met quicker than initially set out.” She also reassures rooky green issuers that most of the information they need to write a Green Bond Framework, that first document on the road to green issuance, will be found within the corporate organisation. “Often Sustainability departments will have the data and methodologies required to define green activities and support the governance of the green bond framework. It could be that such information is not always publicly available but tends nevertheless to be within the company.”

Experts flag key challenges to scaling up the market on the road ahead. Market participants are unanimous in their call to rating agencies to integrate quantitative metrics with sustainability so investors can see a companies’ green trajectory. While Enel’s Canta urges banks to charge less to lend to sustainable companies to fuel the market beyond just bond issuance. “If it is valid for the bond market, as we have shown, it has to be valid for the banking system too,” he says, adding that Enel has also changed its commercial paper programme to attract more sustainable investors. As for Weiss, he is convinced that ambitious KPIs lying at the heart of new step-up structures will both propel corporate sustainability and attract investors in a win-win, virtuous circle. “Companies should push the boundaries of what they define as green or social,” he concludes.

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