LIKE MANY PEOPLE, I follow developments in the Green bond market as closely as I can. While I’m supportive of the market, I do continue to push people hard across the industry on various aspects.
I stand by my calls for the market to be more prescriptive in setting rules and creating formal definitions with potent deterrents for non-adherence, and phasing-out the voluntary Climate Bond Principles; for fairer burden-sharing between issuers, underwriters and investors in terms of issuance and maintenance costs; for a harmonised set of standards for second-opinion providers.
In the spirit of being supportive, but not being afraid to speak out in order to stimulate debate, I say acquisition finance and bond redemptions should both be excluded from the green designation. I’ve been highly sceptical about the place of takeover finance in the green debate for a while. Wind turbine-maker Nordex’s recent €550m Schuldshein gave me the perfect opportunity to air my views.
The story so far: Nordex acquired Spanish renewable energy company Acciona in a deal that closed on April 4. The company refinanced part of its original €1.4bn loan package (which covered both the acquisition cost and a liquidity expansion line) in the Schuldschein (SSD) market.
Original lenders and SSD underwriters BayernLB, BNP Paribas, Commerzbank, HSBC and UniCredit found a solid bid for the four-tranche offering, the intended issue size was doubled and the company also funded the redemption of its outstanding five-year €150m bond, which falls due this month.
The green certification broadened the investor pool: ESG buyers picked up 25% of the notes. All-in-all a very nice deal. As a piece of gushing corporate marketing, being able to say you did the first-ever green Schuldschein is great. Just Google “Nordex Acciona green” and you’ll see what I mean.
But the fact that the Climate Bond Standard Executive Board (CBSEB) and second-opinion provider DNV GL gave the notes the thumbs-up was in my view an example of vested interests pumping the market to create a buzz of self-serving publicity while losing sight of the fundamentals.
Nordex noted in its press release that DNV’s opinion (that the deal “meets the requirements of the Climate Bond Standard and its eligibility criteria for low-carbon and climate resilient investments”) gave the CBSEB comfort to confirm that the proceeds were being used solely for purposes with a positive impact on climate and environmental protection. This was the first instance where certification was granted on any other than conventional Green bonds.
But where, I ask, is the positive impact on climate and environmental protection? It’s a takeover. Both companies were already green, so the starting point is net-neutral on additional protections. In the absence of additionality, isn’t the green designation just bogus?
ACQUISITION FINANCE IS a means to an end. Having renewable or clean energy company A buying renewable or clean energy company B in and of itself adds the square root of zero to climate-change mitigation. Takeovers may create operating-asset additionality for purchasers but they add nothing new to the green economy.
If new investment is part of the deal, that’s fine. To take just one example, last year’s NextEra Energy Partners’ US$2.1bn deal to acquire NET Midstream included US$600m of non-amortising debt secured by the acquired assets and future expansion investment of around US$300m in new debt. I say only the expansion investment should be included in the name of additionality.
I put my concerns to a number of senior sustainable capital markets bankers. “Interesting question”, one said in response. Another said acquisition finance and refinancing are fine from the perspective of the Green Bond Principles.
He acknowledged I had a valid point on the issue of additionality but he made a different point. “The Green Bond market,” he said, “needs to encourage issuance at this stage. To allow only for new capex would be a severe discouragement to corporate issuance.”
Now I can understand the motivations of those dedicated to building sustainable capital markets (aka vested interests) wanting to nurture the market through its formative years. But you can only go so far. Check out the wording on some in the GBP.
Under use of proceeds: “The cornerstone of a Green Bond is the utilisation of the proceeds of the bond… All designated Green Project categories should provide clear environmentally sustainable benefits, which, where feasible, will be quantified or assessed by the issuer.”
Under reporting: “The GBP recommend the use of qualitative performance indicators and, where feasible, quantitative performance measures of the expected environmental sustainability impact of the specific investments”. (All my underlining).
Like-for-like corporate takeovers simply don’t do this. They fail to capture the spirit of the principles, which were written – correctly – to track new green investments funded in the bond market.
Thomson Reuters has logged almost 500 renewable energy deals in its M&A database between the start of 2015 and today. Almost 60 of those have a value of more than US$50m and 14 deals were above US$500m. Those that had an assigned value (184 transactions) total almost US$25bn. I’m trawling through the M&A list and cross-referencing it against the green bond list, and will be following up.
ICMA needs to convene a separate work stream on acquisition finance and come up with some solid guidelines for how M&A debt needs to be captured. Having the market provide an overtly misleading impression of how much debt is being funnelled into new green investments by including corporate takeovers needs to be nipped in the bud.
