Financial success through sustainability leadership: how one energy company is aligning its business strategies to the UN’s Sustainable Development Goals
By Alberto De Paoli, Chief Financial Officer of the Enel Group and co-chair of the UN Global Compact’s CFO Taskforce
In this post for the Sustainable Finance Leadership series, Alberto De Paoli explains how Enel, a multinational energy company, is leveraging the opportunities offered by decarbonisation to deliver on social and environmental goals.
The need for decisive action on environmental sustainability by both private and public sector players is increasingly urgent given the threat posed by climate change. In addition, from a financial standpoint, there is a growing pool of investors that are seeking stable, long-term returns, which has resulted in an exponential increase in the interest in sustainable finance.
These two factors have created the ideal environment for an alignment of financing strategies and business models towards the pursuit of the United Nations’ Sustainable Development Goals (SDGs) while contributing to the generation of long-term value.
Shifting from green to sustainability-linked bonds
Since 2017, the Enel Group has been one of the foremost corporate issuers of green bonds, which are mainly issued to finance specific projects such as the development of renewable energy generation plants. In September and October of 2019, Enel launched the world’s first and second ever ‘general purpose’ SDG-linked bonds on the US and European markets to great success – the issuance was almost four times oversubscribed and its cost was, on average, around 15 basis points (bps) lower compared to a conventional bond. We expect these bonds to become the new standard.
Investors in this new type of bond are asked to finance the company in order to reach certain strategic targets related to the achievement of the SDGs’ objectives. These targets include increasing the percentage of renewables in the company’s total installed generation mix over the next three years. The SDG-linked bond responds to the need for a financial instrument that, unlike green bonds, is tied not to specific projects but instead to company-wide strategic sustainable targets like the penetration of renewable sources in the generation mix and a 70 per cent reduction in greenhouse gas emissions by 2030.
Furthermore, by shifting from green bonds to our sustainability-linked bonds, Enel received a discount on the cost of debt compared to a normal bond. This discount is possible because investors will finance our sustainable strategy, instead of a single project, and if we achieve the sustainable targets set in the bond, we will have improved earnings growth and visibility, and therefore lower the Group’s risk profile.
Harnessing the CFO Taskforce to finance the achievement of the SDGs
The Group’s strategic commitment to sustainability has also allowed me the privilege to serve as the co-chair of the UN Global Compact’s CFO Taskforce. This is the world’s first international initiative that brings together top financial directors to initiate a dialogue between business leaders aimed at promoting sustainable finance and scalable investments to achieve the 17 SDGs.
Through the CFO Taskforce, financial directors play a central role in the development of innovative solutions to finance the achievement of SDGs, which will help to maximise value for companies and all their stakeholders. The initiative also aims to reduce the investment gap in key markets, including by promoting foreign direct investment in emerging markets.
The long-term goal of the Taskforce is to define the principles and lay out the roadmaps for sustainable corporate finance, while at the same time inspiring the global community of CFOs and the investment decisions of companies. This initiative relies on the involvement of nearly 10,000 companies that adhere to the UN Global Compact Principles, in support of achieving the United Nations’ 2030 Agenda for Sustainable Development and its 17 SDGs.
As the line between traditional business models and sustainability continues to blur, the latter has become a direct part of a company’s core processes and related economic results, which have always been the basis of the work of CFOs. Through the UN Global Compact’s CFO Taskforce initiative, Enel wants to give an answer to all stakeholders, not through declarations or promises, but through clear objectives and solid results. The Enel Group’s 2020–22 Strategic Plan sets out that we are investing €28.7 billion over the next three years, of which approximately 95 per cent is linked to the pursuit of the SDGs: around €14 billion is aimed at SDG 7 – ‘Affordable and clean energy’, around €12 billion concerns SDG 9 – ‘Industry, innovation and infrastructure’, and around €1 billion is for SDG 11 – ‘Sustainable cities and communities’, all of which contribute to the achievement of SDG 13 – ‘Climate action’.
Increasing sustainable sources of debt
Over the next three years the Enel Group will increase the percentage of sustainable financing sources to our overall debt from 22 per cent today to 43 per cent by the end of 2022 and 77 per cent by 2030. This increased use of sustainable financial instruments will also allow us to significantly reduce the cost of debt, by directly connecting our Group’s business and cost of capital to our progress towards sustainability goals. Our strategy has led Enel to become the leading company for market capitalisation in the utility European market.
Our vision for the future is directly tied with the need for a ‘just transition’ for all as countries and businesses decarbonise. Companies like Enel, which are engaged in this process, will couple positive financial performance with greater social inclusion, and will be among the first to leverage the opportunities offered by the new economic model as we move towards a net-zero emissions world.
The views in this commentary are those of the author and do not necessarily represent those of the Grantham Research Institute.