Italy’s energy group Enel has recently announced plans to invest €190bn between 2021 and 2030 to further decarbonise its business, improve the resilience of its network and connect more consumers to smart readers. After issuing a pioneering $1.5bn bond linked to the UN Sustainable Development Goals (SDGs) in 2019, Enel released its first integrated report in 2020, merging its financial disclosures with information related to environmental, social and governance (ESG) factors.
“We want to innovate in [every] field related to sustainability,” says Alberto De Paoli, chief financial officer (CFO) of Enel and co-chair of the UN Global Compact’s CFO Taskforce, which aims to promote sustainable corporate finance and investments. He spoke to The Banker about the need to change business models, innovate and better understand ESG risks to move to stakeholder capitalism.
Q: Why do you insist that sustainable finance should focus on objectives rather than on projects?
A: Sustainable finance highlights a market failure because there is a yawning gap between sustainable finance volumes in Europe and investments needed to [transition to a greener economy — ie the €1tn the EU needs to become carbon neutral by 2050]. Finance needs to move from green bonds and loans, which are project-based, to tools that finance companies’ objectives. For a group like Enel, sustainability is a business choice — otherwise it would be remote from management decisions.
Financing sustainability has to be cheaper than financing unsustainable businesses or projects
Sustainable finance can’t be too restrictive or too taxing. And financing sustainability has to be cheaper than financing unsustainable businesses or projects. That’s what we’ve done with our sustainable bond. We moved away from project-linked and moved into general purpose. The approach of the UN SDGs, which we support, is based on objectives, not on individual projects that lead to those objectives. But Europe still has a project-based approach, financed through green bonds. We are talking to the EU, asking to dedicate part of its recovery funds towards funding objectives rather than projects. We’re also talking to the European Central Bank.
Q: Are conversations with investors muddled by lack of clear definitions?
A: At the beginning of any new human endeavour, there’s a problem of definition. Everyone has their own definition. And there is a proliferation of definitions of sustainability and reporting standards, which is an issue. But investors now have a very ‘integrated’ language.
You still have the ESG expert who asks specific questions about governance or gender parity because they need to feed the model, but, in general, in discussions with any type of investor, these factors behind sustainability have already been internalised. Our traditional financial report would typically have about 4000 online views a year; this year, with the integrated report, there have been over 40,000.
Q: Are ESG risks understood well enough?
A: A lot has changed over the past year. When we started talking about our vision, we were looked at as if we were aliens. This is no longer the case, but sustainability risk still isn’t well defined. For example, we have coal-power stations that we’re closing in Italy. They were made 40 years ago. For every coal plant we close, we open between 10 or 20 renewable energy plants. This should be seen as reducing our risk. It diversifies supply and exposure to external factors. Coal costs the same across the world — you can’t diversify the risk of a price spike. But with renewables you don’t need to buy any commodities. You are exposed to the weather, but that’s a risk that you can diversify because if there’s no wind in Italy, there will be wind in the US. This is why decarbonisation reduces our business risk.
Q: How can we move to stakeholder capitalism?
A: Value creation has to be shared, and this has to be obvious. For example, probably all of us would use an electric car but, today, electric cars cost much more than traditional cars. It’s true that the total cost of ownership, over five years or more, brings the two costs closer together, but we know that people tend to have what is called a ‘monetary illusion’ that places less value on the running costs than on the initial purchase. So we need to ensure that the price of an electric car is lower than that of a car running on petrol.
Companies need to make sure that things change. Ten years ago, renewable energy production wasn’t cheaper than coal power production. Now it is. We need to prove that sustainability is not only a good thing to do, but it is also the most economically sensible thing to do. When we can share value across all stakeholders, then we can say that we’re entering a new phase — something that I hope will happen in the next 10 years. In the future, sustainable finance will no longer exist; it will just be finance because unsustainable businesses will all be gone.
This interview has been edited for brevity and clarity.
