How Eni uses a green finance loophole to keep extracting hydrocarbons

An enormous greenwashing operation is quietly unfolding throughout Europe, affecting hundreds of buyers who consider they’re supporting climate-friendly initiatives. These buyers have purchased ‘green-labelled’ bonds issued by Eni, Italy’s largest – and the world’s thirteenth largest – fossil gasoline firm. The issue is that these bonds might be funding carbon-emitting actions, undermining the very vitality transition and local weather targets that Eni claims to help. Because the activist group Reclaim Finance describes the rip-off: “the bond market has turn into a protected haven for simple entry to fossil gasoline finance”.

Eni’s CEO Claudio Descalzi has persuaded hundreds of buyers throughout Europe to again a sustainability technique that may be summed up as: Give me your cash to mitigate local weather change, after which I will determine how a lot of it goes in the direction of exacerbating local weather change.

“The vitality transition is irreversible,” Descalzi stated on a widely known Sunday speak present on the Italian public broadcaster in June, laying out his plan. “However the cash has to come back from non-public capital. Whenever you set targets, it’s a must to present the chance for every industrial exercise to be optimised with the instruments to attain these targets, and to take action freely.”

The very fact stays that each non-public and institutional buyers have signed what are successfully Eni ‘clean local weather cheques’. In the meantime Descalzi earns a staggering €1.6 million a yr, and has been on the helm of the state-controlled firm over a decade and thru 4 completely different Italian governments.

The controversial bonds

The kind of monetary product issued by Eni is named a “Sustainability-Linked Bond” (SLB). Eni has been selling such “green-labelled” monetary merchandise in a number of European nations. This plan was backed by the Italian ministry of economic system and finance, which owns greater than 30% of the corporate’s shares, and a coalition of banks that marketed the bonds whereas downplaying specialists’ warnings about their true environmental affect.

These merchandise are designed to draw buyers who’re involved in regards to the atmosphere. However there may be rising concern that the cash raised by these bonds might find yourself additional funding fossil gasoline actions moderately than serving to the atmosphere. There’s nothing to cease Eni from doing so, and the corporate has vowed to extend its manufacturing of oil and pure fuel in years to come back.

In January 2023, Eni issued one in all its most controversial SLBs, aimed toward climate-conscious retail buyers in Italy. The bond was initially valued at €1 billion, however was so common that it rapidly doubled to €2 billion. 

The success of those bonds was boosted by the moderately enthusiastic angle of the Italian mainstream media, which reported ENI’s statements with out questioning its weak commitments to scale back carbon emissions.

The fact is that buyers in these bonds are unlikely to make a big contribution to decreasing greenhouse fuel (GHG) emissions. Eni’s plans for the cash raised by these bonds are more likely to help its traditional enterprise actions, leaving most of its emissions untouched.

This hoax, involving main public, industrial and monetary powers, was additionally not too long ago uncovered in a report revealed in July by the Anthropocene Mounted Revenue Institute (AFII), a UK-based NGO that helps buyers direct capital into impactful sustainable investments “within the age of human induced local weather change”.

This case highlights the necessity for larger readability and honesty in the way in which monetary merchandise are marketed to the general public. A primary step on this course is predicted when the European Union’s new regulation on inexperienced bonds comes into drive on 21 December this yr (1).

Massive polluters depend on trade self-regulation of eco-bonds

In recent times, SLBs have turn into common with firms as a means of elevating contemporary funds to help their efforts to fight international warming.

However as our analysis reveals, these bonds usually are not as “inexperienced” as they appear. Like conventional inexperienced bonds, SLBs are based mostly on voluntary requirements. The primary distinction is that whereas the previous require the issuer to make use of the cash for particular environmental tasks, SLBs solely require firms to fulfill sure sustainability targets, often known as Key Efficiency Indicators (KPIs). Which means that cash raised by means of SLBs can be utilized for any function, together with actions that might hurt the atmosphere, so long as the corporate meets its KPIs.

Extra particularly, the Italian fossil gasoline firm’s SLBs are linked to 2 key KPIs listed within the issuance prospectus: growing renewable vitality capability by 5 gigawatts (GW), and decreasing greenhouse fuel emissions from its operations by 65% in comparison with 2018 ranges.

Bonds categorized as ESG (selling ‘environmental, social and governance’ advantages) embody not solely SLBs but additionally the extra aptly named “inexperienced” and “sustainability” (in addition to “social”) bonds. The ESG bond market operates underneath voluntary pointers set by the Worldwide Capital Market Affiliation (ICMA), a commerce affiliation that features the businesses that situation the bonds, the companies that certify them and the banks that market them to buyers (2). Which means that the identical actors who profit from these bonds additionally set the foundations and guarantee compliance, making a battle of curiosity.

The ESG bond market isn’t regulated by any public authority, so there may be little oversight to make sure that these bonds truly contribute to environmental sustainability. In Italy, for instance, Consob, the nationwide monetary markets regulator, merely accredited Eni’s SLBs on the premise of common guidelines for monetary merchandise, with out analyzing their environmental deserves.

No surprise SLBs are the popular debt financing instrument of fossil vitality firms amongst all ESG-qualified firms. Knowledge from the London Inventory Alternate Group, used for our evaluation, reveals that between 2021 and 2023 some oil and fuel multinationals have raised round €9 billion by means of SLBs. The fossil gasoline issuers are Repsol (Spain), Gasunie (Netherlands), Odfjell (Norway), Orlen (Poland), SFL Company (Bermuda), Eni and Snam (Italy).

Misinformation greened Eni’s carbon-sponsoring bonds

ENI raised €4.75 billion by means of 4 completely different SLB points between June 2021 and September 2023, making it the most important issuer of SLBs within the fossil gasoline sector. These bonds had been marketed primarily in Italy, France, Germany, the UK and Switzerland, between June 2021 and September 2023, with the assistance of main banks (3).

Each Intesa Sanpaolo (which is an ENI shareholder each immediately and not directly by means of the inexperienced funds marketed by its asset administration arm Eurizon), and UniCredit coordinated the consortium of banks that commercialised the €2 billion SLB reserved for Italian retail buyers in January 2023. The group additionally consists of Banca Akros, BPER Banca, BNP Paribas and Crédit Agricole CIB (the latter two banks introduced final Could that they’ve retreated from oil and fuel bond offers).

In Italy, 310,000 retail buyers purchased €600 million value of bonds within the January 2023 situation, attracted by the excessive mounted charge of 4.3%, which was extra interesting than returns on typical bonds.

Eni’s CEO continued to publicly laud the success of the “greened” bonds. “So many Italians have believed in what we’re doing, each when it comes to progressive evolution in the direction of decarbonised industrial processes and merchandise, and when it comes to guaranteeing vitality safety,” commented Claudio Descalzi on the launch of the Italian bond, which was admitted to buying and selling on the Milan Inventory Alternate in February 2023.

ENI’s board determined to situation the SLBs with out the prior approval of the corporate’s shareholders, because the Italian ministry of economic system and finance confirmed to Voxeurop. The ministry additionally sits on the board and is subsequently co-responsible for any determination, however refused to clarify if and why its representatives formally voted in favour of the problem.

The Italian mainstream media performed an vital position in “greening” Eni’s SLBs by giving them beneficial protection. Main newspapers comparable to La Repubblica and La Stampa respectively described the bonds as “sustainable” and “inexperienced” – two classes of ESG bonds which have to fulfill a lot stricter standards than the SLBs.

As defined, not like “inexperienced and “sustainable” bonds, SLBs haven’t any requirement to make use of the proceeds for particular 100% environmental tasks, permitting Eni to make use of the cash for common functions, together with fossil gasoline manufacturing (4). Unicredit clarified to Voxeurop that certainly Eni’s issuance “was not conceived of as a ‘Inexperienced Bond’”. 

Josephine Richardson, Managing Director and Head of Analysis at AFII, explains that basically, as an SLB issuer, Eni enjoys quite a lot of flexibility and is entitled to make use of buyers’ cash for its fossil gasoline manufacturing, so long as it meets the 2 sustainability targets or KPIs that it has dedicated to in its prospectus. “Each refinancing of debt initially used for oil exploration and expenditure strictly associated to grease manufacturing might theoretically be coated,” she stated.

Eni inexperienced bonds will set off weak GHG discount

Profiting from the laxity of the SLB necessities, Eni arbitrarily set poor local weather targets. Firstly, it dedicated to decreasing a negligible proportion of its whole greenhouse fuel emissions. Secondly, as an alternative of considerably decreasing this quantity of emissions, the Italian oil main determined to largely offset it with reductions achieved elsewhere by shopping for carbon credit generated by third-party tasks (reforestation or renewable vitality). The latter is an inexpensive means for giant emitters to scale back their carbon footprint.

These flaws – unheeded by the Italian authorities – have been identified by impartial organisations, banks and media. The primary criticism got here from Moody’s, one of many world’s main ranking companies, which licensed Eni’s “Sustainability-Linked Financing Framework” (a non-binding doc, not like the prospectus, which units out the corporate’s precise commitments) (5).

In its evaluation (technically known as “second get together opinion”) of Eni’s framework, Moody’s stated that Eni’s SLBs have a “restricted general contribution” to sustainability. It’s because the corporate has dedicated in its framework to speculate the cash borrowed from bondholders to scale back solely its direct emissions (oil and fuel manufacturing and refining) and people related to its vitality consumption. Collectively, these two classes of emissions (categorized as Scope 1 and a couple of, respectively) symbolize not more than 3% of Eni’s whole emissions, in line with Moody’s.

The discount of Eni’s oblique emissions from upstream suppliers and downstream prospects (Scope 3) is excluded from the SLB targets. Nevertheless, such emissions, particularly these from firms that buy and burn fossil fuels for his or her operations (e.g. industrial vegetation and airways), account for the most important quantity of GHGs attributed to fossil gasoline suppliers comparable to Eni.

“Additionally together with the emissions generated by the corporate’s suppliers and prospects (scope 3) would have been the chance for an impactful sustainability-linked bond,” stated Richardson of AFII. “I hope buyers will realise this isn’t a really impactful sustainability-linked-bond and make consequent selections.”

An Eni spokesperson supplied a proof which appears contradictory, stating that the 4 sustainability-linked bonds “have maturities [i.e. the payback deadline] between 2027 and 2030″. They stated that these had been years “wherein it is not going to be doable to find out whether or not or not the Scope 3 goal might be reached – this can solely be identified within the first a part of 2031. It was subsequently not doable to incorporate this goal within the bonds.” 

But Eni isn’t even positive that it’ll obtain the Scope 1 and a couple of reductions promised to bondholders. In reality, if it fails to fulfill these targets, Eni should pay buyers the next rate of interest of 4.8% as a kind of penalty (i.e. 25 share factors greater than what’s often included within the prospectus of SLB issuers). Nevertheless, this penalty is small in comparison with the potential affect of the environmental harm (6).

“We’re nonetheless ready for a publicly agreed methodology to be outlined on Scope 3 emissions,” added Eni’s spokesperson. In actuality, such methodology has already been agreed at an EU stage and may kick in by 2025 (7). 

Moody’s states that Eni’s strategy is “at odds with the suggestions of the Worldwide Vitality Company (IEA) and Intergovernmental Panel on Local weather Change (IPCC), which emphasise the necessity for fast motion to scale back all greenhouse fuel emissions (Scopes 1, 2 and three) as a way to obtain the 1.5°C goal of the Paris Settlement”.

Regardless of its criticism, Moody’s has put its inexperienced stamp on the corporate’s framework, confirming compliance with the Worldwide Capital Market Affiliation requirements. Earlier than issuing the SLB, Eni didn’t ask Moody’s to additionally assess the product prospectus, which formalised the corporate’s weak commitments. Moody’s, which was paid by Eni for its so-called “impartial” certification (issuers at all times pay assessors), declined to remark.

More often than not, assessors’ (or second get together opinion suppliers) opinions are “based mostly on the pre-issuance paperwork such because the SLB Framework, and never on a Bond-by-Bond foundation,” stated the Worldwide Capital Market Affiliation’s spokesperson. “That is clearly the issuers’ determination. There is no such thing as a rule stopping that follow.”

Richardson stated that it’s “typically acknowledged to be non-ideal that SPO suppliers assess financing frameworks moderately than bonds”.

Intesa Sanpaolo insisted that Eni’s framework “has been externally licensed as sustainable” and subsequently “has been categorized as assembly the wants of subscribers who’ve indicated their preferences for sustainable investments” (8). Nonetheless, the shortage of transparency on the a part of Intesa Sanpaolo and Eni raises questions in regards to the means of buyers to make an knowledgeable determination when buying the bond (9). It’s value noting that Intesa Sanpaolo, Unicredit and all of the underwriters besides BPER, along with Eni and Moody’s, are on the ICMA member checklist, working collectively facet by facet for a similar “trigger”.

Over-flexibility might additional water down Eni local weather efforts

As highlighted within the latest AFII report, which assessed 19 SLBs issued by firms in several sectors, Eni’s bond can be questionable as a result of the corporate intends to neutralise 40% of its scope 1 and a couple of emissions by means of using offsets (or carbon credit). Compensating for emissions moderately than decreasing them slows down the transition to renewables and the decarbonisation course of. Eni’s offsets “are reported to be 5.9mt CO2 equal for 2023”.

In its 2023 report the Local weather Bond Initiative (CBI), the world’s largest  certification platform for the financing of sustainable tasks, additionally criticised Eni’s SLB, stating that the corporate ought to “set extra bold discount targets which might be consistent with the trade’s path and don’t embody offsets”. Eni’s plan “relies on offsets, Ccs (for CO2 seize and storage) tasks and the enlargement of the fuel enterprise […] which is not going to tackle the unconventional turnaround that’s wanted,” the CBI researchers wrote of their report.

AFII offers Eni a good 50/50 probability of assembly its SLB targets, and says that this likelihood of success depends upon the corporate’s deliberate use of carbon offsets. Based on the identical report: “A easy extrapolation of the latest pattern of Eni’s SLB would counsel the goal will narrowly be missed […], nonetheless […] offset purchases considerably enhance the prospect of reaching the goal”.

Richardson of AFII argued: “Ought to Eni simply pay to purchase some extra offsets so it may possibly meet its targets and now not should pay their step up on coupon (i.e. increased rate of interest to buyers)? That’s clearly not one of the best use of a Sustainability Linked Bond.” 

All in all, Eni’s SLB doesn’t successfully assist to maintain the corporate on monitor in the direction of its carbon neutrality goal in 2050 (10).  

AFII’s evaluation of SLBs issued by different fossil vitality firms revealed related issues to these highlighted in relation to Eni’s SLB (11).

“Some SLBs issuers had an excessive amount of flexibility with using SLBs previous to organising a reputable transition plan,” Matthew MacGeoch, Senior Analysis Analyst at CBI, instructed Voxeurop, implicitly referring to Eni. “Nevertheless, latest developments present a convergence in the direction of using credible GHG decarbonisation targets (all materials sources of emission, and no abuse of offsets).”

Richardson shares MacGeoch’s optimistic views: “We’re very a lot in favour of this type of product as a result of we consider it has nice potential for affect,” she stated, “though not all these which were launched up to now have essentially had an affect, nor have all of them set excessive requirements or concrete targets.”

Footnotes

1) The brand new laws mentions as follows: “To have the ability to use the designation European inexperienced bond or EuGB, issuers: should make investments the proceeds from these bonds in full, earlier than the bond reaches maturity, in sustainable financial actions coated by the European Union’s (EU) taxonomy* laws (Regulation (EU) 2020/852 – see abstract). These embody mounted property, capital and working expenditures, and property and expenditure of households (this is named the gradual strategy).”

2) ICMA requires that one in all its accredited exterior reviewers consider the ESG bond earlier than issuance to certify that the product meets its pointers (by means of a particular evaluation type).

3) Eni’s SLBs:  7 June 2021, 23 January 2023, 15 Could 2023, 7 September 2023.

4) The prospectus (the general public data doc) that Eni supplied to buyers confirms that: “The bonds usually are not marketed as so-called inexperienced bonds as a result of the Issuer expects to make use of the online proceeds thereof for common company functions and doesn’t intend to make use of the online proceeds for tasks or enterprise actions that meet environmental or sustainability standards”. The identical disclaimer is replicated within the prospectus of the opposite SLBs issued by Eni each in Italy and overseas. 

5) Typically, whereas the framework units the corporate’s general sustainability targets, the precise targets that the issuer intends to fulfill as a counterpart of the funding cashed from bondholders are outlined within the data doc (prospectus) supplied at every issuance. Albeit setting bold targets to scale back the general worth chain emissions in the long run, Eni’s framework clarifies that the corporate will use the SLBs proceeds to scale back, completely, its Scope 1 and a couple of emissions within the quick time period.

6) That is exactly what occurred to the Italian utility Enel (additionally partially owned by the Italian authorities), the primary firm to launch an SLB with a file worth of €15 billion raised between 2019 and 2023. Josephine Richardson, managing director and head of analysis at AFII, remembers that Enel didn’t meet its sustainability guarantees in 2023. Because of this, it should pay bondholders a barely increased rate of interest. 

7) Harmonised EU standards for quantifying and disclosing carbon emissions and discount targets in addition to different environmental and social targets will come into drive in 2025 underneath the brand new Company Sustainability Disclosure Directive (CSRD). Firms should adjust to the CRSD obligations by means of a set of particular European sustainability reporting requirements (ESRS). The usual overlaying local weather change makes reference to a nicely outlined methodology to calculate Scope 3 emissions. 

8) Full response by Intesa Sanpaolo, in Italian: ‘Intesa Sanpaolo e Unicredit sono state Responsabili del Collocamento dell’emissione obbligazionaria Eni Sustainability-Linked 2023/2028 la cui offerta si è aperta il 16 gennaio 2023 e conclusa il 20 gennaio 2023, del quale hanno fatto parte anche Banca Akros, BNP Paribas, BPER Banca e Crédit Agricole CIB, in qualità di Collocatori e Garanti unitamente ai Responsabili del Collocamento. Come indicato nel prospetto, il bond basa la caratteristica di sostenibilità sulla capacità  dell’emittente (ENI) di osservare determinati parametri ESG durante la vita dell’obbligazione stessa.Il Framework (Sustainability Linked Financing Framework) di Eni, a cui l’emissione oggetto della Vostra richiesta fa riferimento, è stato esternamente certificato come “SOSTENIBILE” da Agenzie specializzate indipendenti dalla società medesima e dai Collocatori (‘Second get together opinion suppliers’) e  rispetta i requisiti previsti dai Sustainability-Linked Bond Rules dell’ ICMA (Worldwide Capital Market Affiliation). In virtù di quanto sopra è stata classificata come rispondente alle esigenze dei sottoscrittori che hanno segnalato le loro preferenze per investimenti sostenibili; l’emissione non è stata mai certificata, ne pensata o predisposta, come “GREEN BOND”.’ 

9) In its announcement, the Italian financial institution briefly talked about the SLB framework and referred, for additional data, to Eni’s “Traders” internet web page. Solely by scrolling down the web page, can customers discover the corporate press launch. Nevertheless, it doesn’t clarify what Scope 1 and a couple of emissions imply, doesn’t quantify the anticipated GHG discount related to the SLB, and doesn’t present neither a abstract nor even a hyperlink to the prospectus (which incorporates Moody’s Second Social gathering Opinion). This lack of transparency and lacking data undermines the retail buyers who do not need adequate data to learn the way their cash is definitely getting used, and perceive whether or not Eni’s product meets their true preferences for sustainable investments (or not).

10) Opposite to the IEA and IPCC suggestions, the local weather efficiency achieved by Eni by means of the proceeds of the SLBs within the quick time period represents only a tiny fraction of the GHG discount (together with Scopes 1, 2 and three) projected by the corporate to fulfill its internet zero goal in 2050. “Excessive-quality carbon credit, […] generated underneath stringent environmental and social constraints, will account for about 5% of the general discount in Scope 1+2+3 emissions by 2050,” stated an Eni spokesperson, whereas avoiding touch upon using offsets to fulfill the precise SLB targets. “Our technique doesn’t rely on carbon offsets, however [we] will resort to them the place it isn’t doable to abate residual emissions, i.e. people who can’t but be diminished because of technological and/or financial constraints.” 

(11) Learn additional reviews from the Anthropocene Mounted Revenue Institute (AFII), a UK-based NGO, on different firms, together with SLBs: Orlen, SNAM and Repsol, amongst others. 

Stefano Valentino is a Bertha Problem Fellow 2024. This text is a part of the investigation coordinated by Voxeurop and European Investigative Collaborations with the help of the Bertha Problem fellowship.