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Eaton raises sustainability-linked bond to finance ESG goals

© Shutterstock / Jonathan WeissEaton.

US based power management giant Eaton Corporation plc aligned its long-term financing structure via a $1.3 billion sustainability-linked bond (SLB) to its environmental targets. Interest paid on the SLB will be based on the progress in ETN reducing its Scope 1 and Scope 2 by 40% by 2030, on a 2018 baseline.

ETN (NYQ:ETN) operates in what would be considered a hard-to-abate sector, mainly supplying its products to utilities and the transportation industry. Its 2021 sustainability report contains 2020 targets that were approved by the Science Based Target initiative (SBTi), which it also claims align with ten UN SDGs.

The rising popularity of SLBs (and sustainability-linked loans) to finance transition activities for hard-to-abate sectors is not surprising, as they usually require meeting voluntary sustainability targets, with no restrictions on the use of proceeds.

A second party opinion by S&P described Eaton’s targets as ambitious, and its sustainability profile was deemed in line with peers. Its Scope 2 reduction strategy, of prioritising PPAs over carbon credits and offsets was looked up favourably.

ETN has developed and evolved its energy management products that traditionally worked in a fossil fuel environment, to work with renewable power sources, and with the smart grids needed to distribute renewable energy.

Yet it does not directly drive the transition away from fossil fuels, and hence is not directly investing in green projects.

Eaton’s first ever SLB linked to Scope 1 and Scope 2 reduction targets

Eaton’s first ever SLB, a $1.3 billion bond due in 2033, is tied to a 40% reduction in the absolute Scope 1 and Scope 2 greenhouse gas (GHG) emissions by end-2027, on a 2018 base.

Eaton commissioned a second party opinion from S&P Global Ratings on the alignment of its sustainability-linked bond framework with sustainability-linked bond principles (SLBP) published by the International Capital Market Association (ICMA).

In addition to the targets associated with the SLB, Eaton also aims to be carbon neutral by 2030, with a 50% reduction in reduction in carbon emissions, making 100% of its manufacturing sites certified zero waste to landfill, with 10% of the sites also certified as zero-water discharge. The targets are aligned and approved by SBTi.

In its second party opinion, S&P described Eaton’s targets as ambitious, as it expects to reduce absolute emissions while expecting an increase in production volumes.

This observation was also based on a 19% reduction in Scope 1 and 2 emissions between 2018 and 2020, when production declined due to the pandemic.

While some may describe the company’s targets as ambitious, possibly due to the inclusion of a relatively near-term target of 2030, failure to include any attempt to address Scope 3 emissions feels like a failure to fully engage.

Favourable comparison to peers, Scope 2 reduction prioritises additionality

Eaton’s benchmarking when setting its sustainability targets, as assessed by S&P, shows that its goals are in line with global peers in the same or similar business, and having the same financial profile.

According to S&P, buying renewable energy via PPAs, while excluding offsets and RECs to reduce Scope 2 emissions, prioritises additionality and is in line with best market practice.

The company’s SLB framework also intends to align with UN Sustainable Development Goals (SDGs) –  9 (Industry, innovation and infrastructure), 11 (sustainable cities and communities), 12 (responsible consumption and production) and 13 (climate action), and overall, Eaton sees its 2030 sustainability targets also impacting 10 UN SDG goals.

While Eaton has set goals for diversity and inclusion, it does not have defined policy linking executive compensation with the delivery and performance of its sustainability targets.

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