Infrastructure’s long-term horizon, high upfront capital costs, and risk of stranded assets have all contributed to investors’ greater awareness of sustainability and climate-related risks. However, the growing interest in including ESG factors into financial decisions still falls short of meeting Paris Agreement objectives and averting a climate disaster. Therefore, how can we speed up the investment in infrastructure aligned with a sustainability transition? We first need to understand that about 80% of infrastructure investment is financed with debt, according to the Global Infrastructure Hub. Second, such debt has been increasingly allocated towards sustainable infrastructure, mainly on renewable energy, which is one of the pillars of the net-zero transition among others such as telecommunications and transport infrastructure. One of the most ambitious roadmaps to net-zero is represented in the European Union’s most recent objectives, including a binding renewable energy target of 32% for 2030, which should be ambitious enough to cut greenhouse gas emissions by at least 55% in 2030. Under this scenario, sustainable debt is critical for efficiently allocating capital in the necessary infrastructure to support the climate transition of the region.
According to Environmental Finance data, the most significant issuances in the sustainability debt market occurred in the European Union in 2021. Germany and France became part of the largest green bond issuing countries with the United States, China, and the United States Kingdom. Notably, in the renewable energy industry focused on wind and solar technologies, debt capital allocated via green, sustainability, and sustainability-linked bonds have been concentrated in Italy, France, Spain, and Germany since 2013, amounting to nearly 90 billion dollars illustrated in Figure 1. It is also worth noting that the utility sector accounted for most such issuances, indicating that their business model is evolving but remains reliant on fossil fuels.
Fig. 1 - Amount of debt issued through GSSS bonds from the renewable energy industry (wind and solar) from 2013 to 2021. Data retrieved from Environmental Finance
According to Galina Alova’s recent global analysis of electric utilities’ renewable energy portfolios, most utilities that have hastened their energy transition are centred in Europe. For instance, Orsted has significantly lowered its capacity and natural gas-fired power output to phase out coal generation by 2023 while boosting its renewable energy portfolio. Similarly, Enel has been positioned as the world’s largest private group in the renewable energies sector, to reach 77 GW of installed capacity by 2024. Enel is gradually lowering its reliance on coal until it is fully eliminated: the shutdown of all coal-fired units, which was initially scheduled for 2030, will now be finished in 2027.
Over the last decade, most sustainable financing for renewable energy infrastructure has come through green bonds, the most widely used asset class. However, a new instrument has rapidly grown its market share over the last three years: sustainability-linked bonds (SLBs). These securities vary from standard green, social, and sustainability bonds in that the proceeds have no fixed destination; consequently, businesses can utilise them for any corporate purpose. On the other hand, the sustainability component is built on price mechanisms that link corporate sustainability performance goals to interest rates. The margin ratchet works in both directions. Thus, fulfilling agreed-upon sustainability performance objectives results in a decrease in the margin, while failing to achieve them leads to a rise in the margin. According to the Environmental Finance database, the most often used key performance indicators for electric utilities are reductions in GHG emissions and increased renewable energy investments in their portfolio. Both KPIs are financial material, which means they reflect climate and sustainability factors that, according to the Sustainability Accounting Standards Board, influence the enterprise value from an investor’s perspective.
Figure 2 depicts the total amount of capital debt issued by the renewable energy business in Europe since 2013 and the number of contracts for green and sustainability-linked bonds. We discovered that the quantity of debt capital has not been constant over time, even though the number of green bonds issued has increased steadily over the years. This might indicate that the market is still not mature. Moreover, despite the recent emergence of SLBs, they are on track to nearly equal the amount of debt issued through green bonds in 2022. Although it is still too early to assume that the issuance of SLBs is driving down the issuance of green bonds in the renewable energy industry, it is expected that the growth of SLBs will outpace the growth of green bonds in the coming year.
Fig. 2 - Amount of debt issued (bars) and number of contracts (dots) related to green and sustainability-linked bonds from the renewable energy industry (wind and solar) from 2013 to 2021. Data retrieved from Environmental Finance