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Aaron Franklin, attorney and global coordinator for sustainable capital markets at Latham & Watkins, discusses recent activity by telecommunications companies in sustainable finance.
Telecommunications companies did not issue any green bonds prior to the recent issuances by Telefónica and Verizon. These deals followed closely on one another in January/February 2019, but Vodafone published a framework for a future green bond issuance in 2018.
Companies that participate in sustainable finance (by issuing bonds or loans labelled as green, social, sustainable, etc) report several advantages. First, they further their organisational goals and strategy regarding corporate social responsibility and demonstrate their commitment to the sustainability outcomes targeted by their financing. Second, they increase investor interest in the financing. This can take the form of larger orders, less price sensitivity or more willingness to engage. Third, they build the internal infrastructure and culture necessary to manage and report on sustainability outcomes. These advantages are particularly helpful for telecommunication companies, which are often large, regulated companies that frequently tap the capital markets.
Green bonds and other types of sustainable finance generally require that the issuer label the bond as such and that the bond is connected to some business activity associated with positive sustainability outcomes. Typically, the issuer will promulgate a framework for its sustainable financing, in which it states that it intends to allocate an amount equal to the net proceeds from a bond offering towards project meeting certain criteria, as well as the associated outcomes. The framework will also typically include certain procedural information, such as how the issuer will select projects, manage proceeds and report. A typical example might be that a development bank issues a bond to finance lending to renewable power generation companies.
For telecommunication companies, sustainable finance did not seem like an obvious fit at first glance. These companies utilise substantial quantities of electricity to provide their services and electricity generation is often associated with greenhouse gas emissions. These companies to varying degrees crafted their sustainability framework along three lines (in addition to several more frequently-seen project categories):
The sustainable finance market thrives when issuers are confident that the market will be receptive to their deals. The market’s warm reception of this recent activity by telecommunication companies suggests more deals to come following a similar approach. To the extent the market becomes comfortable with the concept of enhanced connectivity leading to greenhouse gas emission reductions, suppliers and service providers to the telecommunications industry may also seek to issue sustainable financing. More fundamentally, the success of these recent transactions could suggest that investors are willing to work through less obvious connections between business activities and positive sustainability outcomes in other industries.
Interviewed by Emma Millington.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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