AG INSIGHT | 29/05/2020
Gauging greenness: the environmental contribution of telecom green bonds
Michael Wilkins, Global Head of Analytics & Research, Sustainable Finance, S&P Global Ratings, discusses the environmental contribution of telecom green bonds.
As investors begin to diversify portfolios away from carbon-based investments, and corporations start to see that managing environmental risk exposure may bring financial benefits, the range of sectors looking to engage in green finance is broadening rapidly. One prime example is the telecom sector. With the sector’s energy usage projected to double from its 2002 baseline by 2020, telecom companies are turning to green-labelled bonds to help finance projects that shrink their environmental footprints.
The first half of 2019 saw three major telecom companies issuing green bonds: in January, Telefonica issued the sector’s first green bond for €1 billion (US$1.14 billion); Verizon followed in February with a US$1 billion bond, and Vodafone issued its green bond for €750 million (US$840 million) in May.
But just how “green” are these green bonds? To assess their environmental contribution, we looked at these financings through the lens of our Green Evaluation. Scoring across a range of factors related to transparency, mitigation and governance criteria, the Green Evaluation analyses the environmental net benefit of a transaction relative to its sector and region.
The green potential of telecoms
By 2030, the telecom and information and communications technology industry may account for around 2% of global greenhouse gas (GHG) emissions – comparable to the aviation industry. In order to mitigate this growth, significant investment is required to modernise networks, and green bonds could well be a means of raising the necessary capital.
In fact, the green bond frameworks published by Telefonica and Vodafone outline energy efficiency and reduced GHG emissions as key targets. Using green bond proceeds, Telefonica is aiming to reduce its GHG emissions by 30% in 2020 and 50% in 2030 and has committed to ensuring its electricity consumption is 100% renewable by 2030. Vodafone has set similarly ambitious targets for its green issuance: to cut total Scope 1 and 2 GHG emissions by 40% and use 100% renewable sources for on-grid electricity by 2025. Meanwhile, Verizon says its new bond will help to meet its commitment to reduce the carbon intensity of overall operations by 50% by 2025 from a 2016 baseline.
Fibre-to-the-home networks, for example, not only offer performance gains of at least 10 times compared to that of copper networks, but also use 80%-90% less energy per gigabyte of data traffic, thereby decreasing GHG emissions.
Investment in this type of advanced infrastructure can also yield wider environmental benefits by supporting the development of artificial intelligence-powered Internet of Things (IoT) systems such as smart cities. These systems have the potential, by improving the efficiency of business management and through the influence they have on consumer behaviour, to indirectly reduce GHG emissions for the broader economy.
But with some investors expressing concerns that these issuances may be opportunistically seeking a green label to fund projects that could be described as “business as usual” and lack environmental contribution, we applied our Green Evaluation analytical approach to the transactions issued by Vodafone, Telefonica and Verizon. The results indicated that all three green bonds would likely fall into the top half of our scoring range (the E1 or E2 categories on our E1-E4 scale).
It is important to note that, we only included direct impact projects in our analysis. Though they may potentially extend to end users, we believe that it is difficult to be certain about the wider environmental benefits of telecom green bonds outside their own specific environmental footprint. As such, we did not include an evaluation of the relative environmental benefit of the indirect impact projects, such as 5G deployment.
All three transactions have procedures in place such as tracking and auditing proceed allocation and measuring environmental impact, which would likely result in strong Governance scores. Additionally, all three companies state that their proceed management processes are aligned with the Green Bond Principles.
However, the transparency scores for the green bonds examined would vary. Under our analytical approach, a company must publicly disclose project selection criteria based on the environmental objectives of the transaction, as well as the actual or expected environmental impact of its eligible projects, to achieve a high transparency score.
In financing high performance and premium value products such as fibre, we acknowledge that the proceeds of green bonds in the telecom sector may indeed support a company’s commercial objectives. But, as our analysis shows, they can also have a positive environmental impact by improving a network’s energy efficiency – which would support their Mitigation scores.
In this light, a project’s direct green contribution can be recognised, regardless of potential overlapping motivations behind it – and the popularity of issuances to date indicate that investors agree. The final book for Telefonica’s green bond stood at US$5.4 billion, representing an oversubscription of over five times, with almost half of the investor pool identifying as green. Verizon’s green bond was eight times oversubscribed, making it the company’s most popular security ever.
It appears, then, that the market has accepted the unique characteristics of green bonds in the telecom sector, and may be willing to finance similar projects in the future.
Michael Wilkins is Global Head of Analytics & Research, Sustainable Finance at S&P Global Ratings