Telecommunication companies start issuing green bonds

Aaron Franklin, attorney and global coordinator for sustainable capital markets at Latham & Watkins, discusses recent activity by telecommunications companies in sustainable finance.

How have telecommunications companies been involved 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.

Why are telecommunications companies keen to participate in sustainable finance?

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.

How are bonds issued by telecommunications companies ‘sustainable’?

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):

  • indirect effects of improving connectivity performance—each company stated that amounts would be allocated towards investments to improve their connectivity performance. Their position was that doing so enables energy efficiency savings across industries, such as smart grids, enhanced machine-to-machine communication, and better performance of public transportation, among other advancements. According to a report by Carbon Trust (a not-for-dividend consulting company) and the Global e-Sustainability Initiative (GeSI) (an information and communication technology industry group), such improvements have the capacity to substantially reduce greenhouse gas emissions on a net basis
  • direct effects of upgrading infrastructure—each company stated that amounts would be allocated towards investments to improve existing infrastructure, directly enhancing energy efficiency. Such improvements include more efficient cooling facilities and, in Telefόnica’s case, swapping copper wire for fiber-optic
  • non-CapEx – Telefónica and Verizon stated that amounts would be allocated towards expenditures not generally considered capital expenditure or investments, the most common categories of business activity comprising eligible projects in a sustainability framework. Such expenditures included purchase of renewable power under renewable power purchase agreements (for Verizon, this included purchases under “virtual” power purchase agreements not involving physical delivery)

What is the future of green bond issuances by telecommunications companies?

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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