Insight & Analysis

True colours: how ‘brown’ businesses are using sustainable finance to go green (part one)

Published: Jan 2020

Some industries are more challenged than others when it comes to delivering tangible green measures; that should never stop them trying. This week we look at how Irish energy utility, ESB, is calling upon its treasury to help it transform for a greener future.

Single green seedling growing in big patch of soil

The idea that the world’s fossil-fuel-hungry power generators could do anything to ease the environmental pressure created by climate change is, to some, something to be watched with interest. It demands a massive sea change in thinking, and that requires huge long-term investment.

One such company, ESB Group – the state-owned electricity company operating in Ireland, the UK and worldwide through its ESB International business – is making steady inroads into change. Its treasury function is at the forefront of that change.

First timer

ESB has a debt portfolio of over €5bn, 80% of which is raised through bonds in the debt capital markets. It issued its inaugural (and Ireland’s first) public corporate green bond in June 2019. This €500m, 11-year fixed rate offering (with a coupon of 1.125%) is part of its broader strategy to lead the transition to a reliable, affordable, low carbon energy future. Susan McCarthy, Group Funding Manager at ESB Group, explains that the funds are ear-marked for projects around renewable energy sources, improving energy efficiency, clean transportation, and the ‘greening’ of its buildings.

On the customer-side this means developing new energy products and services, such as its recently launched 100% Green Electricity Price Plan by its retail arm Electric Ireland. These initiatives aim to encourage end-users to be more energy efficient, in line with the Irish government’s Climate Action Plan that will electrify heat and transportation in the country.

ESB is building its strategy around these plans, says McCarthy, but this does not come cheap, with a requirement for around €1bn in capex per year, most of this going into power generation and the country’s electricity network.

Changing the source

Ireland’s generation units are currently fuelled by a wide range of resources, including gas, coal, peat and renewables such as hydro and wind (the latter giving around 800mW onshore). What ESB is trying to do is transition to a low carbon portfolio of generation by 2030. Of that, it is targeting at least 50% of its generation output to be sourced from renewables.

It is making good headway. In 2018, it took a 12.5% stake in the 335mW Galloper offshore wind farm located 30kms off the coast of Suffolk in the UK. This deal (estimated at around €228m) represents a significant first step for ESB into offshore wind generation. More recently, in November 2019, ESB acquired a 50% stake in EDF Renewable’s Neart na Gaoithe (NnG) 450mW offshore wind project 16km off the east coast of Scotland. It now has plans for wind farms in the Irish Sea off the coasts of Louth and Wexford.

Funding change

As part of its green bond programme, ESB outlined its long-term generation plan for its fossil fuel plants. ESB has committed that its 900MW coal plant will be closed by 2025; its peat plants will be closing imminently. The programme also demanded that it closely examine its existing network’s capacity to handle all new forms of sustainable energy, as they come on stream.

On the network side – the physical infrastructure that delivers power to 2.3 million customers – ESB Networks knows that it faces a challenge in balancing energy systems, says McCarthy. It has around 5.5GW of renewables already connected – “one of the highest penetration rates in the world” – but the aim is to go further, she says. However, network delivery is mostly one-way (customers consume) where the need is to cater for a two-way flow (with solar panels, for example, contributing capacity). To make this achievable, huge investment is needed.

ESB Networks is also investing in the roll out of smart meters for all electricity customers in the Republic of Ireland, with full coverage set for the end of 2024. This should help users better visualise, and therefore plan more efficient energy use. “Plenty more capital; investment is planned,” confirms McCarthy.

Finding support

Sustainability is a big issue for all utilities; ESB has taken a proactive stance. It has been in conversation with numerous banks, over the past few years and has engaged closely with bodies promoting sustainable finance in Ireland, such as Sustainable Nation Ireland. Furthermore, the National Treasury Management Agency (NTMA), which manages public assets and liabilities, called upon ESB to attend one of its roadshows, NTMA displaying “welcome openness” to sustainable finance, says McCarthy.

Of course, that openness to the idea of sustainability also permeates corporate culture at ESB, but the idea was allowed to develop naturally. “We knew it would be a good fit from the outset, and we knew also that senior management would be very supportive,” says McCarthy. “But within treasury, we wanted to fully on-board the idea ourselves, just to make sure we could talk knowledgeably through all the issues, before recommending it.”

Building a programme

With sustainable finance getting the green light across the organisation, treasury set about pre-empting investor lines of enquiry, even conducting research on itself to pin down likely issues and expectations. “We would have been getting those questions anyway eventually; we just felt it was the right time to respond to them,” says McCarthy.

Once treasury had recommended the sustainable finance pathway, it met with full enthusiasm. To kickstart the programme, a broad-based cross-functional working group was established. As well as financial experts, it was essential to have the engineers in the group offering guidance and even interacting with the external opinion providers, says McCarthy. Indeed, by providing technical details of practical projects across the business, in easy-to-understand terms for non-technicians, it allowed the funding team to incorporate these into ESB’s green bond framework.

Ultimately though, the programme needed to be driven by treasury, managing the financial agenda and setting milestones for all involved. It also needed treasury’s capacity to deliver when it came to meeting potential investors. “If you think normal roadshow preparation is intense, this was off the scale,” jokes McCarthy, referring to the plethora of new acronyms and taxonomies that come with the territory.

Brown to green

There is no guarantee that investors will be interested and it is apparent that many are now looking closely at the green claims of target companies. Some industries (including power generation) are more challenged than others when it comes to delivering tangible climate-relevant measures. These so-called ‘brown’ industries may even struggle to get traction on their bond issuance.

Whilst brown industries have massive efficiency gains to be made in the context of sustainability, more and more investors are expecting the full story before committing. The questions are certainly becoming more targeted, notes McCarthy. “We found that on our ‘brown’ bonds, we were being asked about our carbon intensity,” she says. “I recall being asked our percentage revenue from coal, which at the time was quite difficult to explain.” Green bond issuance allows ESB to address these difficult questions and to explain all in detail.

Carrying on

Having made its successful debut into the green bond market, ESB is fully intent on carrying on, says McCarthy. But it may need to add other sources of sustainable funding to keep pace with its transformation.

As a utility, ESB’s projects are always big ticket, spending around three quarters of all capex in the network area. But, as an energy utility that has been in business for over 90 years, McCarthy appreciates that it is not always easy to designate these projects as green, projects reinforcing distribution potentially impacting fossil fuel generation. “We need to get to grips with that, but there are other products available, such as sustainable linked loans, that we are investigating.” Clearly for this business, treasury’s work continues.

In part two, we look at how the treasury of vehicle leasing specialist, LeasePlan, is tackling its emissions.

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