Sustainability-linked bonds include financial incentives (e.g., interest rate rebate/penalty scheme) linked to the achievement of pre-specified sustainability targets. In the context of coal transition financing, the targets typically would include a reduction of carbon emissions or an increase in renewable generation capacity.
Case study
Tauron Polska Energía bond
Key elements
Size of issue: Five-year bond of PLN 1 billion ($250 million).
Use of proceeds: To increase renewable energy capacity and undertake grid upgrades allowing for the integration of higher volumes of intermittent renewable energy sources. Proceeds cannot be used for new or existing coal-fired power plants.
• Santander Bank Polska is coordinator, lead arranger and bookrunner of this bond, while the EBRD subscribed for 24% of the bond (PLN 240 million).
• Two key sustainability targets (interest rate is increased if these indicators are not met):
Benefits of this structure
• Provides a clear financial incentive to reduce emissions and increase renewables capacity.
• Maintains flexibility on how the sustainability targets can be achieved.
• Funds are raised from a diversified pool of investors, including a development bank cornerstone investor, which helps spread risk and lower the cost of financing.
Enabling conditions
• Ability to measure emissions accurately and reliably.
• Ability to verify that company has not spent funds on new or existing coal plants.
• The issuer developed a programme to address the impact of its intended business transformation on its workforce; for example, identifying opportunities for reskilling, and implementing certified retraining.