Enbridge Inc.'s sustainability-linked bond framework could represent the next frontier in pipeline sector finance as investors look for management teams to deliver on environmental, social and governance commitments, industry observers and credit rating experts said.
The Canadian pipeline giant on June 17 enumerated the performance indicators affecting borrowing costs it would use when issuing those bonds, like progress on reducing the intensity of its Scope 1 and Scope 2 greenhouse gas emissions by 35% by 2030, as well as progress on achieving 28% representation of racial and ethnic groups in its workforce, 40% gender diversity across the company and 40% representation of women on its board of directors by 2025.
"Midstream doesn't want to be left out in the cold like coal. ... Equity markets are already closed for the most part, and the bond markets are not," S&P Global Ratings Senior Director for North American Infrastructure Michael Grande said in an interview.
"I think midstream is still viewed as not the dirtiest sector in the oil and gas space, so anything these companies can do to show that they're part of the solution is going to help because you don't want someone like BlackRock Inc. saying they won't invest in the sector. That would be a huge problem."
Matthew Taylor, a director at energy investment bank Tudor Pickering Holt & Co., said in an email that he expects more Canadian pipeline firms to release similar bond frameworks, while Fitch Ratings senior director Thomas Brownsword also expects them to catch on in the U.S.
"If Enbridge succeeds with this and is able to say, 'Look, a company like mine issued bonds that didn't have this and I issued my bonds and I did and I got a price difference,' then the others will do it," Brownsword said in an interview.
"I would think it would take a year or two before some of the really large-cap [U.S.] pipeline companies follow suit … but if the yield is 50 basis points they might all do it before the end of 2021," Brownsword said.
Even though Enbridge is the first among North American midstream giants to connect ESG goals to its funding strategy to incentivize achievements, Gibson Energy Inc., a much smaller Canadian operator, announced in April that it converted a $750 million revolving credit facility into a sustainability-linked revolving credit facility. The bond's performance indicators include the reduction of Scope 1 and Scope 2 emissions intensity by 15% by 2025 as well as achieving 21% to 23% representation of racial and ethnic minority groups in its workforce, increasing representation of women to at least 40% of the board and the workforce, and appointing at least one board member identifying as Indigenous or from a racial or ethnic minority by 2025.
Globally, sustainability-linked bonds have already gained significant traction. According to a May 17 note from Moody's ESG Solutions group, worldwide issuance totaled $8.5 billion during the first quarter, "already on par with the full-year total from 2020."
Utilities are particularly active in the space. NRG Energy Inc. in December 2020 issued $900 million in senior notes in what was North America's first use of the emerging financing instrument. Several other U.S. power companies have committed to the International Capital Market Association's principles for green, social and sustainability bonds, which can be tied to specific projects.
Edison International's framework, for example, is linked to certain types of investment including clean transportation, renewable energy and energy efficiency projects but not nuclear energy or large hydroelectric investments.
In the midstream sector, Ratings' Grande noted that while he does not anticipate that issuing sustainability-linked bonds will directly affect companies' credit ratings, it could be an indicator for borrowing costs.
"I think you'll see very quickly that for the companies falling behind in this, it'll cost more to borrow," Grande said.