Sustainability-Linked Bonds Head to Midstream

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Canadian midstream giant Enbridge is the latest to develop a framework for issuing sustainability-linked bonds as oil and natural gas companies look to add accountability to their energy transition goals. Enbridge published Friday a series of targets the company will need to meet to capture agreed-to interest rates on future sustainability-linked bonds. Should it fall short of meeting those targets, its borrowing rates would increase by a set amount dictated by the debt’s terms. Sustainability-linked bonds differ from so-called “green” bonds that have also gained traction as lenders and investors flock to investments that support the Paris climate agreement. Proceeds from green bond issuances must go toward specific low-carbon investments. But proceeds from sustainability-linked bonds can go toward any corporate purpose -- including the extraction, transport and sale of oil and gas. The kicker is that they have their rates tied to wider environmental, social and governance (ESG) targets, and rise if targets are only partially met. With sustainability-backed bonds still in their infancy, credit ratings agency S&P Global Ratings estimates total issuances could top $50 billion this year, compared to $650 billion in green, social and sustainability use-of-purpose bonds. Still, $50 billion-plus of issuances would quintuple such issuances from last year. Tackling 'E,' 'S' and 'G' Enbridge’s sustainability-linked framework includes both emissions and employee diversity targets: • Progress on reducing its operational (Scope 1+2) greenhouse gas (GHG) emissions intensity by 35% by 2030; • Achieving 28% representation of racial and ethnic groups in its workforce by 2025; • Achieving 40% gender diversity by 2025; • Achieving 40% representation of women on its board of directors by 2025. The 2030 emissions goal is a stepping stone toward Enbridge’s bigger ambition to achieve net-zero operational emissions by 2050 (NGW Nov.16'20). An independent auditor will verify its progress in these areas annually to ensure compliance with any bonds linked to this framework. Growing Appetite Enbridge is not alone among oil and gas companies in taking this route. But its participation is notable given that much of the interest to date has come from integrated European oil and gas producers looking to diversify away from fossil fuels. Spain’s Repsol published its first framework Monday, joining TotalEnergies and Eni. Earlier this month Italy's Eni became the first oil producer to issue bonds according to such frameworks (IOD Jun.8'21). Finding Its Place Issuing sustainability-backed bonds is both a measure to build goodwill and an effort to tap cheaper debt. The auditing associated with these bonds will help provide stakeholders with additional transparency regarding ESG performance. It could also allow oil and gas incumbents to capture lower interest rates at a time when borrowing rates are starting to reflect emissions performance and skepticism of the industry at large (OD Jun.16'21). For Enbridge, achieving its emissions goals will require a multipronged approach. It is looking to lower the operational footprint of its extensive liquids and natural gas pipeline and distribution systems by modernizing equipment and using renewables to power its operations. But it is also looking at ways to tailor its business toward transporting lower-carbon fuels over time. The company, for instance, operates two renewable natural gas projects in Ontario and is investing in several more, operates or has under construction 2.1 gigawatts of net renewable power generation capacity, and is evaluating opportunities in carbon capture and storage. Enbridge is also looking to pilot the blending of excess green hydrogen from its power-to-gas facility in Ontario into its gas distribution network. Casey Merriman, Phoenix

Equity and Debt Markets, Low-Carbon Policy, Midstream Companies
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