First Green Bonds Sold by an Oil Giant Find Willing Investors

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  • Concern that environmental bond may also aid fossil fuel
  • Sustainable investors bought 45% of the oversubscribed issue

An oil platform, operated by Repsol SA, in the Mediterranean Sea off the coast of Tarragona, Spain.

Photographer: Angel Navarrete/Bloomberg

A major oil company is set to benefit from the sale of green bonds for the first time, raising concerns about standards in the quick-growing market for environmentally-friendly finance.

The Spanish refiner Repsol SA on Tuesday is due to complete the issue of a five-year 500 million-euro ($559 million) green bond, which was priced on May 9. While the funds will help Repsol cut greenhouse-gas emissions and make its facilities more efficient, some specialists in the market aren’t convinced Repsol’s security deserves the green label.

“This is fundamentally dubious,” said Sean Kidney, the founder of the Climate Bonds Initiative, the London-based organization that drafts green-bond standards. “At the moment we’re unlikely to include this in our listings of green bonds and our data for green bond indexes.”

Less than a decade old, the green bond market raised $95 billion for projects meant to benefit the environment last year and is on track to reach issuance of $123 billion this year, according to Bloomberg New Energy Finance. Since no single regulator defines what counts as green, it’s up to investors and advisers like the Climate Bonds Initiative to assess them.

With the International Energy Agency estimating $44 trillion is needed to decarbonize the economy by 2040, some investors want funding to target only zero-emission renewable technologies. Others, like those who subscribed to Repsol’s bond, see value in mitigating pollution from oil and natural gas, which are destined to be around a long while. 

Repsol says the bond is a way to fund energy-efficiency projects, seen as the “low-hanging fruits” of emission reductions. The security raised money to improve boilers, furnaces, heat equipment and oxygen control systems at refineries in Spain and Portugal. 

It would help “avoid 1.9 million tons of greenhouse gas emissions annual run rate by 2020,” according to an assessment of Repsol’s bond by Vigeo Eiris, the Paris-based environmental ratings company. That’s the equivalent of what’s produced by about 400,000 cars.

Sustainable Economically

“The energy industry is a big source of emissions globally," said Kristian Rix, a spokesman for Repsol. “If we can make investments in efficiency and do better business, then we’re actually doing this transition in a way that is not only sustainable environmentally, but is also sustainable economically.”

Repsol will exclude projects related to the exploration of new oil and gas reserves from the green bond, and employ external auditors to ensure only qualified projects receive funding, according to the bond documents. The company also wants to invest in technology to boost the efficiency of heating and cooling systems as well as mitigate methane emission and flaring. It’s already reduced emissions by 4.3 million tons in the last decade and is focused on shifting toward natural gas and away oil and coal, Rix said.

To be sure, Repsol isn’t the first fossil-fuel company to tap green bonds. An oil company in Thailand, Bangchak Petroleum, raised $95 million two years ago in a green bond offering aimed at expanding its renewable energy business, though the Climate Bonds Initiative said in the press at the time it didn’t have enough information about the deal to count it based on its measures. The company changed its name to Bangchak Corp. this year.

Utilities that have relied on fossil fuels, including Westar Energy Inc. and Engie SA, have issued the securities to develop strategies for renewables. What distinguishes the Spanish oil giant’s issuance is that it’s the first tied directly to a major oil company, with upstream and downstream fossil fuel businesses.

“In one sense these green bonds are doing exactly what they are supposed to do,” said Kenneth St. Amand, portfolio manager at Natixis Asset Management’s responsible-investment unit Mirova, which oversees $7.2 billion but decided to stay away from Repsol’s bond.

Environmental Risk

“There needs to be some positive impact at the end of our analysis before we make an investment," St. Amand said. “We’d prefer to see no environmental and social risk in our portfolio.”

Kidney at the Climate Bonds Initiative said oil companies like Repsol shouldn’t be excluded from issuing green bonds. Instead, they should be encouraged to dedicate the funds that they raise into renewable energy businesses like offshore wind farms. The organization has worked with Mirova to develop standards for what qualifies as green finance.

His concern is that plowing funds from green bonds into efficiency upgrades at refineries may undermine efforts to slow global warming by extending the life of fossil fuels.

Green Shades

The market for environmentally-friendly securities is responding to investor concerns by labeling different shades of green bonds, Moody’s Corp. said in March. That could help investors understand just how environmentally friendly their green bonds are.

Demand for Repsol’s green bond “grew exponentially,” with more than 2 billion in orders in the first hour of execution, according to a term sheet from bookrunner Banco Bilbao Vizcaya Argentaria SA. The deal was 4.4 times oversubscribed and priced at 5 basis points more than the issuer expected. Its 0.5 percent coupon was the lowest ever for Repsol on a public transaction, according to BBVA, which ran the deal with Citigroup Inc. and HSBC Holdings Plc.

For Repsol, the green bond provided a diverse set of investors with orders coming from 20 countries. About 45 percent of the bond was bought by sustainable investors, similar to the split for other Spanish sustainable and green bonds issued this year, according to BBVA.

“We were pleasantly surprised by the strength of demand,” Rix said. “With a bit of luck, this will serve as an example for others to follow.”

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