Insight & Analysis

Widening the investor base: Leading corporates reflect on the draw of ESG

Published: Feb 2021

ESG leaders like Enel, Novartis and Daimler say they are attracting a wider investor base with SDG-linked and green debt issuance.

Environmental concept and development goals

A growing number of companies are emerging as sector leaders when it comes to reducing their carbon footprint and meeting climate change targets. Not only are they future proofing their business strategy, showing ESG ambition and raising awareness. They are also finding it easier to attract investment from investors increasingly focusing on ESG best-in-class corporates.

At Italian utility Enel, ESG integration began in earnest about five years ago with a board-level pledge to become a benchmark in the green bond market. The company outlined how it would use green proceeds in line with the 2018 Capital Markets Association Green Bond Principles in its own Green Bond Framework. Enel also 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,” said Alessandro Canta, Enel’s Head of Finance and Insurance.

Next, the energy giant sold the first ever Sustainable Development Goal (SDG) linked step-up bond. In the innovative structure, Enel’s cost of borrowing rises if the company fails to meet key KPIs around the UN’s Sustainable Development Goals 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, put Enel ahead of many other corporate peers.

Crucially, the bond is structured so that the company receives a lower cost of funding if it meets its KPIs, in an innovation that introduces a value to sustainability. “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,” said Canta.

The idea that sustainability has a value – and businesses need to be incentivised, in this case by a lower cost of funding, to protect the natural world – was one theme in Professor Sir Partha Dasgupta’s wide ranging review, commissioned by the UK Treasury and published last week. His report proposes recognising nature as an asset as well as reconsidering our measures of economic prosperity and is expected to set the agenda on government policy going forward.

Other corporates emerging as leaders in their sectors include 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. 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.

Daniel Weiss, Deputy Group Treasurer at Novartis also explained that issuing the bond has attracted a wider investor base. “Our investor base in this bond is slightly different from the investors we usually see in our bond issues.” Sentiments echoed by German car maker Daimler’s Head of Treasury Kurt Schäfer, whose team sold the company’s first €1bn traditional green bond last September in response to 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.”

Moreover, ESG investors are not just attracted to the most celebrated companies. There is a growing investor enthusiasm for corporate transition stories, said Samantha Sutcliffe, Head of Green and Sustainable Finance at UBS. “Investors are keen to support companies that are not necessarily 100% green today but have a decarbonisation strategy beyond business as usual in place.”

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