Analysis: Investors divided by green bond from Spanish oil company Repsol

The investor community is divided over a green bond issued by oil company Repsol this week, with some comparing the transaction to a “drive-by shooting”.

The Spanish oil and gas giant issued the paper on Tuesday to finance energy efficiency projects and low-carbon technologies. According to its green bond framework, the €500m deal will be allocated across a series of eligible categories, with an initial focus on energy efficiency projects including network optimisation and the upgrade of equipment. In future, low-emissions technology investments are expected to be added to the pipeline, including methane emissions mitigation and renewables.

Repsol has committed to use no more than 55% of the proceeds to refinance existing projects. No projects involving the exploration of new oil and gas can be included.

The bond is in line with the Green Bond Principles and has a second-party review from Vigeo Eiris. As well as annual reporting at portfolio level, the bond will be externally verified by auditors on an annual basis, both for management of funds and allocation of proceeds.

Repsol’s goal is to avoid 1.9m tons of GHG emissions by the end of the decade, and to contribute to the Sustainable Development Goals, it said.

But investors are split on whether the deal is a positive thing for the market.

Many of the leading green bond investors did not participate in the transaction, RI has learnt, but others did.

“I welcome Repsol showing initiative here, because we really need a broader range of issuers,” said one established green bond investor based in London. “But I didn’t feel any sort of ambition with this. It was like having a really polluting factory and then offering to change the lightbulbs to LEDs.”

“I’m not saying every green bond investment we make has changed the world, but when an oil company comes to market, it really needs to be a good story. If you think about the reputational risks for an asset manager with a green mandate buying into an oil company, you need to be able to offer a pretty solid explanation to your end client. In this case we couldn’t because the green bond was only really tackling a small portion of what the company is doing.”

In addition to the use of proceeds, a number of investors told RI that the lead time on the deal was not sufficient to do the required environmental due diligence for the offering.

“The biggest problem was the very short time between the deal being announced and the books opening. Usually for a debut issuer in this space, even an SSA [Supranational/Sovereign/Agency] or a less controversial company, you provide roadshows and solid lead times to do the required analysis. This felt like a drive by shooting,” said one investor.

“Overall, I want to know what kind of advice was being given to the issuer by its advisors,” concluded the London-based investor. “You can’t blame Repsol if they have not been advised properly on the risks of coming to market like this.“There is no doubt that as this market matures and more banks get involved, you are going to get banks with weaker practices, and when that happens it becomes even more important that investors are doing their homework on these deals.”

Spain’s BBVA was the structuring bank, while Citigroup and HSBC were joint coordinators. Banca IMI, BNP Paribas, CaixaBank, Goldman Sachs, Morgan Stanley, Santander and Societe Generale were bookrunners.

BBVA told RI that 45% of investors on the deal were SRI investors. They did not respond further to requests for comment at the time of publication.

This is the second green bond from an oil company. In 2015, Thailand’s Bangchak Petroleum sold $92m-equivilent of notes to finance the expansion of its solar operations. That deal caused controversy at the time, with some investors saying they would not participate because they did not want to prolong the lifespan of an oil company.

“Our view was that that was a green bond that was clearly seeking to finance a transition to a low-carbon business model,” said another well-respected green bond investor. “To ask for support to reduce your revenues for oil and increase your revenues from renewable energy is a valid argument in our eyes. We don’t rule out green bonds just because they come from oil companies.

“But the Repsol deal is not claiming to finance a transition to a more sustainable business model. It will finance emissions savings that will have a miniscule impact on the business.”

Another investor claimed the energy efficiency upgrades being financed would ultimately “just make it cheaper for Repsol to keep on producing oil”, which he claimed undermined the renewable energy industry and the green bond market.

But other investors are more positive about the transaction, saying Repsol is a leader in its sector and should be supported.
“They really have precise targets for CO2 reduction, and this bond has a second-party opinion and reporting commitments,” said Michael Kobel, a portfolio manager at Germany’s Union Investment, which has just launched a dedicated green bond fund. Uniquely, the fund assesses the ESG credentials of the issuer as well as the use of proceeds.

Kobel told RI that most oil companies would not pass the ESG screen, but Repsol was “one of only a few that pass our internal criteria”. “In the end, we should support companies that are trying to show leadership and have a long-term goal to become greener”.

Many investors said the company’s green bonds could be viable investments for them in the future, if there was a clearer transition story, and if they were given more time to engage with the company ahead of bookbuilding. RI could not reach Repsol for comment in time for publication.