Enel Forced to Raise Coupons on $11 Billion of ESG Bonds

(Bloomberg) -- Enel SpA will raise the coupons it pays investors on several so-called sustainability-linked bonds, after the Italian energy company triggered a penalty by missing its greenhouse-gas emissions targets.

The missed 2023 goal means that Enel bonds worth about $11 billion will now pay a total of roughly €83 million ($89 million) in additional interest, according to a calculation provided by Bloomberg Intelligence. 

It’s the most significant penalty yet in a market whose first bond was issued by Enel in 2019. It also underlines how the energy crisis, sparked by Russia’s invasion of Ukraine, is hampering companies’ climate commitments. Other SLB issuers to have felt the fallout are Greece’s Public Power Corp., which has already missed a similar target. 

“Due to the unprecedented crisis faced by the European energy system in 2022 and 2023, the group’s emission reductions in 2023 were not sufficient,” Enel said. “Despite these unprecedented circumstances, the group’s emissions intensity in 2023 remained in line with the 1.5C trajectory” that Enel has committed to, it said. 

The market for SLBs hasn’t been around for long, and investors are still figuring out how such products behave under pressure. Expectations that an issuer may be on track to miss a target can jolt bond prices, which Enel already saw play out last year. 

Interest payments on five bonds amounting to €5.75 billion will go up by 25 basis points, the company said in a notice to investors on Tuesday. The existing coupons range from zero to 0.5%. The move also has ramifications for US-dollar notes worth $4.75 billion, according to Enel’s 2023 sustainability report. 

On Tuesday, an Enel bond due in 2027 that’s linked to the missed emissions target — meaning it’s set to see its coupon go up — outperformed a comparable Enel bond that isn’t linked to the sustainability target. 

“This is a positive event for the SLB market. It shows that targets can be ambitious, and the step-up coupon can provide a hedge for investors,” said Josephine Richardson, head of research at the Anthropocene Fixed Income Institute. “I would expect the bonds which will receive a step-up to quickly outperform.”

SLBs differ from green bonds in that they let companies tap demand for sustainable debt products without having to ringfence proceeds for projects with direct environmental or social benefits. Instead, borrowers pay a penalty if they miss company-wide goals such as cutting pollution.

Enel missing its 2023 emissions goal “does not immediately conclude that its 2030 emission intensity target is out of reach,” said Kevin Leung, a sustainable finance analyst at the Institute for Energy Economics and Financial Analysis. “However, the company should learn from this experience and step up its renewable buildout plans to signal continued seriousness to its transition plan.”

(Adds Bloomberg Intelligence analysis in second paragraph and IEEFA quote in final paragraph.)

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