How private and public capital can accelerate sustainable investments and trigger a green recovery

#CriticalThinking

Climate, Energy & Sustainability

Picture of Alberto De Paoli
Alberto De Paoli

Chief Financial Officer at Enel Group

Private and public capital should be at the heart of global green ambitions. Yet, despite its growth in recent years, the sustainable finance market only accounts for less than 2% of global fixed-income issuance. It’s time for this economy to grow to its full potential and offer a broader range of instruments.

At the moment, green bonds represent the lion’s share of these sustainable instruments, with around $270bn issued in 2019. The end goal is to support investment on sustainable activities (renewables, infrastructures and networks), and respond to a constantly growing demand by investors. Green bonds, and use-of-proceeds bonds in general, certainly represent useful tools for companies that already have a segregated sustainable business they would like to develop.

For companies – like Enel – where the strategy and business model are clearly sustainable, innovative general corporate purpose financing products – which create financial incentives for companies to fulfil their sustainable practices – are the best way to advance sustainable capital markets. In this respect, Enel issued the world’s first general-purpose sustainability-linked bond on the US market and on European markets.

The structure is very simple and easily replicable. The standardisation provided by the ICMA with its ‘Sustainability-Linked Bond Principles’ – inspired by Enel sustainability-linked bond experience – represents a key milestone, providing guidance to those issuers that intend to use this new financial tool. In September, three sustainability-linked transactions were issued by three global corporate players – Suzano, Novartis and Chanel – across three different industries. Thus, they have showcased how this kind of tool can serve the financing needs of all the players that intend to invest in sustainable strategies.

The European Green Deal will create an enabling framework for private investors and the public sector to facilitate sustainable investments

A key turning point in this regard was the decision of the European Central Bank to accept these instruments as eligible as central bank collateral and in the context of the asset purchases under the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP). The decision will be applicable from 1 January 2021 and the statement has officially recognised the new asset class as a key component of the sustainable finance space.

To foster best market practices and present a unified and coherent suite of sustainability-linked financing instruments to the market, we established a ‘Sustainability-Linked Financing Framework’, providing a suite of key performance indicators (KPIs), targets and principles, to guide in the use of sustainable finance instruments in a comprehensive way. Enel is the first company to define a framework of this kind for issuance across multiple funding solutions, showcasing how sustainability can be integrated across different financing tools.

Public funds could also help accelerate a corporate-driven sustainable recovery by stimulating specific policies to fix market failures. This type of financing could be an essential driver for the energy transition, helping private companies address technological and market risks.

The European Green Deal Investment Plan (EGDIP) is the investment pillar of the Green Deal, mobilising at least €1tn in sustainable investments over the next decade. It will create an enabling framework for private investors and the public sector to facilitate sustainable investments.

We need an acceleration to transform sustainable finance from niche to norm

The Next Generation EU package can serve as an extraordinary tool to help the EU shape a sustainable post-COVID recovery and support investment in the green and digital transitions. Sustainable finance can play a key role in this regard by mobilising public and private capital towards sustainable investments.

As we need an acceleration to transform sustainable finance from niche to norm, leveraging on loans provided by the Next Generation EU and linking them to the achievement of ambitious sustainability KPIs should be considered a concrete available option.

An effective incentive could be the setup of national sustainable finance funds that could provide grants and subsidized Sustainability-Linked loans to corporates Corporates and SMEs, leveraging on the role of EIB and national development banks and providing blended finance solutions.

In this framework, Enel is continuing to support the growth of the sustainable finance market through the use of Sustainability-Linked instruments, the partnership with EU institutions in giving course to sustainable investments and also with the identification of innovative solutions which can sustain the path to recovery. This current crisis provides indeed a unique opportunity to build back better. By capitalising on sustainable finance, Europe can make the green recovery a reality. For companies that want to place sustainability at the heart of their business model, the financial tools already exist. It’s time for public and private capital to work together to create a bright future for generations to come.

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