Edison International is the latest U.S. utility to issue a results-based financing strategy to generate funds for targeted clean energy, transportation and carbon reduction projects and cement its commitment to net-zero greenhouse gas emissions by 2045.

The company released a sustainability financing "framework" June 2 that its president and CEO, Pedro Pizarro, said "underscores the strong link between our strategy and financing activities."

Edison will use metrics such as avoided greenhouse gas emissions for projects funded under the plan to ensure they are properly aligned with the new strategy. Edison plans capital investments of about $16 billion over the next three years, much of which is expected to follow the new financing rules.

The plan places Edison in a small but growing club of power companies that have committed to the International Capital Market Association's principles for green, social and sustainability bonds at a time when investors, regulators and customers want proof that utility climate efforts deliver.

Sustainability bonds, which combine green and social benefits, grew significantly in the last year, according to the London-based Climate Bonds Initiative, which tracks the market. Globally, financing for all three bond categories almost doubled in the last year, the group said in a recent report.

The International Capital Market Association, known as ICMA, issued its best-practice standards in recent years to reduce concerns over greenwashing in the burgeoning market for sustainability-related bonds and other nontraditional finance instruments.

ESG policies get closer scrutiny

The ICMA's efforts are coinciding with a regulatory push in the U.S. and Europe to hold companies more accountable for their environmental, social and corporate governance promises.

The EU recently began to impose mandatory ESG disclosure requirements on the financial industry, requiring companies to publish a sustainability risks policy on their websites.

The U.S. SEC is also expected to initiate a new rulemaking to tighten requirements for ESG disclosures on climate risks and diversity initiatives.

At the same time, utilities hoping to build confidence in their net-zero pledges are adopting stricter financing standards to show customers and investors that their clean energy projects bring meaningful results.

"I think it will help us differentiate ourselves from other folks who maybe aren't as far along, or aren't as thoughtful or haven't developed a strategy, frankly, around the energy transition and some of these sustainability categories," Drew Murphy, Edison's senior vice president of strategy and corporate development, said of the company's new finance strategy in an interview.

Nuclear, hydropower off the table

Edison's plan specifies which types of energy investments are eligible for funds it will raise from bond issuances and other finance instruments and which are not. Clean transportation, renewable energy and energy efficiency projects are included, for example, but nuclear energy and large hydroelectric investments are not because investors typically avoid such projects, Murphy said.

The plan also spells out how projects will be evaluated, selected, and later reported and audited. By declaring tangible outcomes such as emissions reductions from specific proceeds, the company hopes to show investors their impacts.

"It's not just putting an ESG wrapper around the financing," Murphy said. The new strategy could also give the company more favorable financing terms as competition over sustainability investments heats up, Murphy added.

1 size does not fit all

Three other utility players — Southern Co., Oncor Electric Delivery Co. LLC and the National Rural Utilities Cooperative Finance Corp. — have adopted the ICMA's green bond standards in the last year, according to a recent tally by the National Law Review. A couple of other utilities, Avangrid Inc. and NRG Energy Inc., issued similar plans.

Avangrid was first out of the gate in 2017 when it issued a $600 million bond under its own green financing guidelines that its parent company, Iberdrola SA, said were "inspired" by the ICMA's principles.

The bond offering was four times oversubscribed, and its proceeds supported a 208-MW wind farm in North Carolina, a 56-MW solar plant in Oregon and a 75-MW wind project in Colorado. Together, the installations help avoid about 450,000 metric tons of carbon dioxide annually, Avangrid estimated.

In December 2020, NRG Energy issued $900 million in senior notes in what was North America's the first issuance of a "sustainability-linked bond" tied to key performance indicators. Such bonds can result in penalties if specific environmental targets are not met.

An emerging financing instrument, sustainability-linked bonds are not tied to specific projects such as new wind and solar farms and thus are more flexible than the so-called use-of-proceed bonds utilities such as Edison are pursuing.

And in January, Southern Co., the nation's third-largest utility by market cap, issued the first $400 million green bond under its new sustainable financing framework to help fund clean energy projects the company needs to reach net-zero emissions by midcentury.

Southern Co. was the first large-cap utility to adopt the ICMA's sustainability principles for its financing plan and said it hopes that it will inspire other companies in the utility sector to do the same. Murphy said Edison looked at the Atlanta-based utility's plan as well as the few other initiatives that were recently rolled out in developing its new strategy.

"In companies outside our industry, people have obviously been using this framework for a while," Murphy said. "The market is just reaching our industry now."