Italian oil and gas company Eni’s recent €6bn sustainability-linked loan is drawing criticism for "bond market creep" as it will test its environmental targets only once during the five-year maturity of the loan.
SLLs are usually tested annually and copying one-off tests from the public bond market is seen as an unwelcome development in the private loan market, which uses SLLs to engage with borrowers and incentivise improvements in ESG performance as well as penalise those that miss targets.
“We’re a private market and should be able to set a glide path for improvement over the life of the loan, not just one fix at a point in time and that’s it,” a senior loan banker said.
The loan has already been flagged to the Loan Market Association. The trade body’s sustainability-linked loan principles require annual reporting to monitor borrowers’ performance against key performance indicators and the sustainability performance targets that are used to calibrate them.
The principles do not recommend how many targets should be set, but say that SPTs should be “set in good faith and remain relevant throughout the life of the loan”, and asks borrowers to explain in detail how a single SPT satisfies the principle of "ambition" to protect the integrity of the SLL label, the LMA said.
In this instance, each KPI references just one SPT during the SLL's five-year maturity.
“Parties should pay particular care where it is proposed that one SPT per KPI is sufficient for the life of the loan,” said Gemma Lawrence-Pardew, senior associate director for legal at the LMA. “This is an issue we at the LMA shall be debating more fully with our dedicated ESG committee in upcoming weeks.”
Eni good?
As well as single testing, the brief time period before the tests was also a concern for several loan bankers who looked at the deal.
Eni’s SLL references the company’s sustainability-linked financing framework that was updated in May after being used for the company’s €1bn seven-year sustainability-linked bond in June 2021.
The oil company is using two of the framework's four KPIs on the SLL. The first, for the installed capacity of renewable electricity, will be tested just once – on December 31, six months after signing. If Eni hits the SPTs of more than 1.669GW of installed renewable capacity, it will receive a 1.75bp margin reduction and a similar penalty if it misses.
The second KPI, for net carbon footprint upstream for Scope 1 and 2 emissions, is also scheduled to be tested just once – two years after signing at the end of 2024 with a similar 1.75bp discount or penalty. That gives a maximum step-up or step-down of 3.5bp.
A second loan banker described the brief six-month window as "almost cynical" and a third said that they were "not impressed".
“If you can’t meet that, you’ve really miscued it. You’d like to think for an asset-heavy investment industry like generation, you would know what your capacity was going to be in six months' time. It’s not like it's going to surprise you, is it?” the second loan banker said.
A syndicate of 23 banks was led by Credit Agricole, Santander and UniCredit as underwriters, global coordinators, bookrunners and sustainability coordinators, and Intesa Sanpaolo as bookrunner.
Eni was not available to comment. Credit Agricole, UniCredit and Santander were also unavailable for comment.
Troubled
When the deal was signed on July 28, Eni said that the SLL is “in line with Eni’s goal of fully integrating its financing with its sustainability strategy aimed at achieving carbon neutrality by 2050 and contributing to the achievement of the UN’s Sustainability Development Goals".
But the quality of the KPIs and SPTs had already troubled Moody’s, which provided the second-party opinion on the framework in May.
Moody’s described the KPIs as "robust" but the ambition of the SPTs as "limited" and said that 2030 and 2040 SPTs do not appear to be aligned with two degrees or 1.5 degrees of global warming. MSCI’s implied temperature rise tool puts Eni's activities on track for 3.1 degrees of global warming.
“It is unclear how the short and mid-term financing instruments will facilitate the achievement of the long-term target and align the issuer's corporate strategy with the goals of the Paris Agreement,” Moody’s said.
Additionally, the second KPI for net carbon upstream emissions for Scope 1 and 2 covers only 3% of Eni’s overall greenhouse gas emissions, which Moody’s described as “weak”, not least as the Intergovernmental Panel on Climate Change is stressing the importance of short-term action to make CO2 emissions peak by 2025.
While Eni cites reducing Scope 3 emissions as a "paramount priority", it has not yet used either of the two KPIs that cover this measurement (net CO2 lifecycle emissions and net carbon intensity for Scopes 1, 2 and 3) on any of its sustainability-linked loans or bonds.