Top 2 Most Creative Financings of 2020

A green bond is when a company raises debt and promises to use the proceeds to fund for climate, environmental, or resilience projects. These financing vehicles have been around for a while…. but the issuers and banks are just starting to get creative. 2020 saw the first hints of this creativity… and two of these transactions caught my attention this year:

Schneider Electric’s 0% “Sustainability-Linked Bonds”

Schneider Electric is leaning into the energy transition. They provide energy and digital solutions for efficiency and sustainability. Led by Jean-Pascal Tricoire, the company is moving from incumbent to innovator and is now the de-facto leader of the digital energy transition. the company has now taken their progressive stance to the financing markets:

Schneider launched the first ever sustainability-linked convertible bonds. Sustainability-linked bonds (SLBs) are bond instruments that embed environmental, social and governance (ESG)-related indicators that issuers commit to achieve. If they fall short, bondholders receive additional payments. Several SLBs have already been issued (by companies like Enel), but this is the first sustainability-linked convertible bond (SLCB).

Schneider Electric is tracking three indicators, and the metrics will be verified by EY.

  1. Deliver 800 megatons of saved and avoided CO2 emission for customers by 2025
  2. Increase gender diversity: 50% of hires to be women, 40% women among front-line managers, 30% women in leadership teams by 2025
  3. Train 1 million underprivileged people in energy management by 2025

If the company fails to achieve a minimum sustainability performance measured by a combination of these KPIs, it must make a premium payment on the loans. Incentives at work… and setting the bar high for others!

Hannon Armstrong’s 0% Convertible Green Bond

Hannon Armstrong raised $500M+ in a green bond, with $125M of that at a 0% convertible note.

Hannon Armstrong is the first U.S. public company solely dedicated to investments in climate change solutions, providing capital to leading companies in energy efficiency, renewable energy, and other sustainable infrastructure markets. With more than $6 billion in managed assets as of June 30, 2020, Hannon Armstrong’s core purpose is to make climate-positive investments with superior risk-adjusted return.

With this focus on climate and financing, Hannon Armstrong is pioneering new approaches to lowering the cost of capital for climate-oriented investments. The 0% convertible note is only the second of its’ kind: a slightly larger firm (Microsoft) did this a few years ago. With a lower cost of capital for their own investments, Hannon Armstrong can now relay those savings along to the projects they are financing in-market.

Summary

The energy markets are undergoing change. Now the most innovative firms pioneering that change are also implementing new financing structures to enable and incentivize the transition.

This innovation will drive down the cost of new infrastructure projects for the entire ecosystem. Greater innovation and competition in the financing vertical means the project owners win.

I suspect 2021+ we will see many more 0% convertible green bonds and sustainable-linked bonds throughout the entire energy ecosystem: from startups to Fortune 100.