Sustainability is a business choice and a philosophy that will reshape the face of capitalism. In other words, the new capitalism can only be sustainable if it is to remain profitable. And in the world of energy, sustainability means energy transition: digital networks, renewable sources, electric mobility, green hydrogen. On these pillars, Enel is gaining a leadership role and establishing a business model that directly involves finance with innovative tools. Alberto De Paoli, CFO of Enel, supports the concept of stakeholder capitalism and explains the importance of this turning point in this interview with FIRSTonline in which he also discusses the recovery, recovery plan and sale of Open Fiber.
Let's start with Enel's quarterly report just published and which confirmed the targets for 2021: do you feel like saying that the worst is over? Or will the effect of the pandemic still weigh on your activities in Latin America?
“I would say yes, the worst is over. All the indicators show a certain degree of recovery in the economic activity which is found in the demand for electricity. Commodity prices have returned to pre-crisis levels. The rights on CO2 are very high, favoring the replacement of thermo plants with renewable ones. We expect to recover pre-Covid levels as early as this year and to recover normal growth rates as early as next year. As I said, our business is improving and we will see the effects already in 2021 but the full evidence of the recovery will be seen in 2022: we must consider that energy is sold a year in advance, 2021 discounts 2020 prices and does not benefit recovery still in progress. The only negative effect that could persist for a little longer is that on exchange rates in Latin America, linked to Covid and the end of the pandemic.
There has been talk of an impact of around 1 billion on this year's accounts.
“The impact is exclusively linked to the exchange rate impact and is estimated at between 800 million and one billion euros but these are mark-to-market figures, therefore at the exchange rates in force today. The precise account can only be made at the end of the year”.
The sale of Open Fiber will bring proceeds of 2,65 billion to Enel and a capital gain of 1,7 billion. The closing is expected in November. How will it contribute to this year's targets, will it lead to an increase in investments?
"This year, the sale of Open Fiber will contribute to the achievement of the targets already announced in the communications to the market, at the same time making it possible to finance an incremental organic development of the company which will positively contribute to the growth profile in future years".
Given the importance of the sale, do you not expect the distribution of an extra dividend for the shareholders?
“Since this latest 2021-23 strategic plan, we have adopted a different dividend distribution policy, oriented towards the new concept of stakeholder capitalism. In fact, we try to offer our shareholders a concept of medium-long term total return for the shareholder. On the one hand we have a component of guaranteed and fixed dividends with an increasing trend for the next few years no longer linked to the variability of results; on the other we have the growth of the company's value driven by its sustainable growth. The combination of these two factors can offer our shareholders a return prospect of 12-13% over the next 10 years. In this logic, the concept of extra dividends loses meaning, the important thing is a total return that has sustainable development and the right weights at its core”.
Sustainability and energy transition walk together. Just in recent days, Enel renewed its commercial paper issuance program in US dollars, bringing it from 3 to 5 billion and linking it to the UN's SDG 13 sustainable development goal. How is your sustainable finance program progressing? And what results is it producing?
"On this point I think it is necessary to focus on some aspects. I would like to remind you that we started among the first, some years ago, with the issue of green bonds. Between 2017 and 2019 we issued 3,5 billion, they were the only sustainability-related instruments available at the time. They are tools made to finance specific projects but which present various critical issues including the fact that by not financing the core business of a company but specific sustainable projects they cannot be linked to a distinctive strategy of the issuing company and due to this specific nature they cannot give an advantage cost to the issuer. Instead, a company that presents itself with a sustainable business proposal cannot be defined in a sum of projects but in a logic that, moving from a sustainability review of its business proposition, tends to greater profitability and less risk and therefore to a greater value creation. In this case, a loan linked to these assumptions must cost less. When we focused on these concepts, we searched the market for a tool that could synthesize them but we didn't find it".
Then?
“Therefore, we have created the most suitable financial product to represent the choice of a business concept focused on sustainability. This is how the first SDG-linked bond linked to the sustainability objectives (Sustainable Development Goals) identified by the UN was born. It involved issuing bonds not linked to any project but to the concept of sustainability and the creation of intrinsic value in our business proposition: the instrument is issued at a discount because the perspective induced by our sustainable development tends to guarantee higher rates of profitability and lower risk but if the objective you declare you want to achieve is not achieved, you pay a penalty which effectively returns the discount to the market. A profound transformation of the company's business model is needed to be able to access this kind of financial products. In 2019, we issued nearly 4 billion of these new bonds. During the first year of the issue we received great appreciations and also some criticisms. Also because the product was very innovative and therefore required a fairly long period of discussion. During this period the instrument lacked international standardization and the ECB, for technical reasons, was not yet ready to purchase it as part of its bond purchase programmes. In a short time, everything changed. The ICMA (International Capital Market Association) has taken steps to standardize the instrument and the ECB has changed its opinion on purchases and new bonds which have now become mainstream and are becoming increasingly central to financing the energy transition”.
In short, a success.
"Absolutely. All our finance will gradually be transformed into sustainable finance with SDG-linked tools. This year we have also decided to extend the model to all the instruments we adopt: bonds, commercial paper, loans, insurance. We have set ourselves the goal of reaching an initial target of 2023% sustainable finance in relation to gross debt in 48, but I think we will bring this target forward. As mentioned, these are products that we have issued at a discount, we are talking about 20 basis points less than normal instruments. And rightly so: we are demonstrating that the choice of sustainability creates value and improves the risk/return curve".
This is a mass of about 25 billion in sustainable instruments out of 50 of debt. Not a few. The message has reached the big funds. At least judging by the stance of giants like Blackrock.
“The investment funds have taken the message and got it. So are savers and other stakeholders. Only the rating agencies are missing: they continue to give judgments in which this creditworthiness assessment is not integrated but they too are converging on the concepts we have discussed”.
The energy transition is one of the strong themes of the Recovery and Resilience Plan, the PNRR. Your strategic plan already indicated an acceleration of investments in renewables and networks: what new opportunities are opening up now thanks to the arrival of the new European funds?
“Enel in Europe operates mainly in four countries: Italy, Spain, Romania and Greece which have all presented their plans as part of the Recovery Fund. Our programs in these countries are homogeneous and articulate the energy transition on networks, electric mobility, renewables, hydrogen. Overall, we plan to invest 24 billion in the three-year period instead of the 15 billion of the previous plan with a decisive reallocation of investments in Europe given the funds already available in the European budget.
Arrival at the Next Generation EU, the so-called Recovery Fund: we have presented projects in these same areas and we think we can increase investments in Europe by 10-15% compared to what we had defined. Keeping in mind that there can be no energy transition if we don't start from the networks. This is the first point from which to start: you cannot invest in the transition without involving the infrastructures. Just as it is unthinkable to be able to navigate at 10 Giga without a fiber optic network, it is equally impossible to think of tripling electricity consumption, using only renewable sources in the generations or connecting 5 to 10 million electric vehicles in 2026 with current networks " .
One final note in closing. You talked about stakeholder capitalism: It's a new definition, can you explain it to us?
"This is not a new concept, but today it is once again gaining great relevance. It identifies a renewed approach to capitalism, according to which a company operates in a logic of sustainability and with the aim of creating shared value for all its stakeholders. This is declined in terms of tax transparency as well as governance, innovation, attention to communities and the environment. The approach is in full harmony with our Purpose and for this reason, like Enel, we are promoting it at all levels with the intention of making more and more large industrial groups converge on this approach. For those who work in our sector, this concept coincides with the energy transition".
This new vision of the role of business is very interesting, but don't you think that if we look at the technological giants – Big Data such as Facebook, Google, Amazon and Apple – concepts such as stakeholder capitalism Are they still light years away?
“When we started talking about sustainable value, two-three years ago, we were very few. Now many things have changed. As CFO of Enel, I am vice president of the UN Global Compact task force where, with other CFOs of large multinationals, we are working towards a common definition of sustainability and development. And I must recognize that international companies are evolving in this direction. So I'm quite optimistic."
