How Should We Think About Debt Capital Markets Today? ESG’s Effect On DCM

By Sonal Patney

How Should We Think About Debt Capital Markets Today? ESG’s Effect On DCM  is not the wonderful Great Gatsby or a Cinderella story; this book is a realistic perspective about the shaping of the capital markets in this day and age, debt capital markets transactions with an ESG component, sustainable finance banking deals, and trends that are developing in Europe and the US, in particular. Since the COP26 UN Climate Change Conference, since the COVID 19 pandemic the agenda for the public and private sector has changed, i.e., the much-established EU regulations on this topic and others developing in the EU and the US now, the tremendous performance of the leverage finance market recently, and the utilization of ESG companies’ investment grade debt and leveraged debt have led to other regions following in the same respect. We are evaluating the varying structures of ESG-linked debt used to raise capital (through various types of bonds and loans), causing a societal benefit due to this usage in the long and short runs, and how the changing trends due to these structures, through the ESG principles, for the banks, borrowers and lenders alike are hopefully aligned with what each stakeholder requires and profitability as well.

Sonal Patney is a corporate and investment banker, has worked at many well regarded international and domestic banks, and a consultant having also worked on many short-term assignments in debt and equity capital markets, with early-stage disruptive technology companies, middle-market, and large corporate companies across diverse sectors, and on political consulting in Minnesota. Most notably, she is a graduate of Columbia University’s School of International & Public Affairs, and New York University, holding an MPA with a concentration in International Economic Policy and a BA in Political Science, respectively. Sonal loves to travel, is an avid networker (as such a member of a couple of international finance associations – Ellevate, the FENG, and FWA), a fluent Hindi speaker, a SCORE LI mentor, and currently, resides in Great Neck, Long Island. This is her first book, and it is written with much enthusiasm and passion for this important and timely subject matter.

• Language: English
• Publisher: Europa Edizioni
• Release date: Nov 30, 2022
• ISBN: 9791220134668

Book preview

How Should We Think About Debt Capital

Markets Today? ESG’s Effect On DCM

For my Cyrus Jai Patney,  the best son ever to have.

Thank you to the muse,

the situation this book was written upon,  and all those who have been supportive  throughout this endeavour.

I think, therefore I am.  Cogito ergo sum.

René Descartes

FOREWARD

Dear Reader, 

Transformation and transition, not simply within the energy sector, clearly need the relevant mobilization of capital for those necessary sustainable investments required to achieve the 2030 Agenda and the United Nations’ Sustainable Development Goals. 

As highlighted within the IPCC 2022 Report, finance should represent a vital enabler of a low-carbon transition, thus reducing net GHG emissions and improving resilience to climate impacts. 

The sustainable debt market has boomed over the past

10 years, with issuances rising from USD 33 billion in 2012 to USD 1.7 trillion in 2021 [IEA WEI 2022]. 

The urgency and scale of the underlying global climate change challenge needs a novel level of effort and coordination at the worldwide level, involving both public and private actors. The emergence of sustainable finance represents a milestone in financial innovation that is fundamental to support a just transition by redirecting public and private capital to sustainable investments. In this regard, sustainable finance instruments - such as green bonds and Sustainability-Linked bonds - are specifically designed to align incentives for corporations and public institutions to adopt greener business models.

While green bonds represent a chance for economic sectors with a transparent path to net zero, hard-to-abate sectors are still lacking. Given the difficulty of finding viable and suitable assets for green bonds’ allocation for the energy and hard-to-abate sectors in general, other alternatives have emerged among transition finance and sustainable finance. Among these alternatives, Sustainability-Linked bonds represent a promising new avenue for issuers.

As Enel, we have contributed to the rise of the newborn Sustainability-Linked bond market by issuing the world's first transaction of this kind in September 2019, and we now count on a total portfolio of SustainabilityLinked debt of 63€ Beq as of July 14, 2022, all tied to our SDG 7 and SDG 13 targets.

This study proposed by Sonal Patney highlights the advantages inherent in Sustainability-Linked bonds and loans (SLB/SLL). They differ from green bonds for not being use-of-proceeds kind of transactions, but rather financing instruments that raise funds for general purposes at the corporate level. They focus primarily on the credible net-zero pathway at the issuer level and encompass more than just financing selected sustainable projects: in this sense, issuers explicitly commit to future improvements in sustainability outcomes within a predefined timeframe. 

SLBs are forward-looking, performance-based instruments, they link the issuer’s sustainable strategy with core, representative, transparent and ambitious KPIs and Targets, and with the presence of a financial incentive to pursue such sustainable path.

Moving away from a purely project-specific logic and toward more general and sustainability-related financing that commits both private companies and public institutions to substantive and transformative sustainable goals could unlock untapped potential. 

After the Group's first Sustainability-Linked bond, the global Sustainability-Linked bond market reached $182 Beq [BloombergNEF, July 31st 2022], an asset class being recognized and used not only by industrial companies and financial institutions from different sectors and regions but also by public institutions and governments to concretely support the achievement of ambitious climate and sustainable change goals. 

Reaching net zero targets requires a massive ramp-up of spending on clean energy, particularly by the private sector, which should account for 70% of all energy