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Power-hungry phone companies dial into surging green bonds

London

PHONE carriers are huge energy users, and need to cut emissions. They also face massive bills to build out the next generation of wireless networks. Green bonds promise to help them with both.

A steady flow of issuance could be building: Orange SA and BT Group Plc are poised to follow Telefonica SA and Verizon Communications Inc. in selling securities designed to fund environmentally friendly projects. The industry has already completed at least US$3 billion of sales since January, its first steps into a sustainable debt market that Bloomberg New Energy Finance estimates could exceed US$370 billion this year.

The proceeds can help telecom companies replace power-hungry copper wires with fibre-optic cables, or build the 5G networks that promise to make cities, homes and factories more efficient. There's plenty of investor appetite for this new take on sustainable investing, but there's a catch: any hint that a bond doesn't genuinely help the planet can cause some buyers to flee.

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Juuso Rantala, who holds Telefonica's green bond in the 400 million-euro (S$621 million) fund he manages at Aktia Asset Management Ltd. in Finland, said: "If I find out that I cannot trust the company in the case of green bonds, I cannot trust them in many other ways too. If I cannot trust them, I don't invest.''

For carriers, the task is urgent. The communications industry accounts for about 10 per cent of global electricity demand, and that could exceed 20 per cent by 2030 as demand for data balloons, according to Huawei Technologies Co.

Telecom companies can clean up their act by replacing copper with glass wires, for instance, that would use 85 per cent less energy, according to Telefonica. And 5G can enable a range of environmental benefits by allowing smart buildings to monitor heating, connected warehouses to optimise their logistics and power grids to better allocate electricity.

But these companies are already staggering under a mountain of debt from, among other things, buying 5G licences. They'll need to make sure they can keep their borrowing costs low and tap investors when needed.

Wider pool of investors

That's where green bonds can help: the interest costs are about the same as on these companies' conventional securities, but they offer the opportunity to access a wider pool of investors.

The share of funds focused on socially responsible investing, which includes environmental projects, has risen 34 per cent over the last two years, and now accounts for US$30.7 trillion of assets globally, according to the investor group Global Sustainable Investment Alliance.

Morgan Stanley analysts led by Emmet Kelly wrote in June: "Demand from funds that have incorporated sustainability into their investment framework has been key.''

Telefonica, based in Madrid, is a good example. Demand for the issue, which priced in January, was significant: the company received five times the orders than what was available for sale, and obtained a spread more than the mid-swap rate that was about 25 basis points lower than initial indications.

The yield on the 1 billion-euro 5-year security is in line with the rest of its curve, Bloomberg data shows, indicating it didn't have to pay a premium to tap demand for sustainable credit. It's a similar story for Verizon and Vodafone Group Plc.

Orange and BT Group are paying attention - they have inserted clauses into their Eurobond prospectuses which would let them issue green bonds in the near future.

For investors, the risks go beyond what's expected for any fixed-income asset. Buyers also have consider just how green these bonds are.

For a start, there's always the possibility that this new breed of green-bond borrowers divert proceeds to inappropriate purposes, including pooling them into general funds. Though monitoring groups such as credit rating firms can discourage such behaviour, it's something investors need to watch.

But 5G presents a particular environmental paradox. Internet-Of-Things technologies will connect billions more devices and require many more antennas, so 5G will initially use more power than 4G, according to Sustainalytics, an independent corporate sustainability research firm. This complicates the idea that 5G can be a green investment.

However, Sustainalytics estimates the energy savings from 5G outweigh the extra emissions to deploy the new tech by a ratio of 5 to 1. The firm's analysis of the Verizon bond issue, which included 5G deployment among the potential use of proceeds, found that it was a credible candidate for green financing.

It's a good thing, because Verizon plans on returning to this corner of the bond market. It looks like it will be welcome, too - its US$1 billion issue of 10-year green debt was eight times oversubscribed within six hours of being offered for sale, said Jim Gowen, head of supply chain and sustainability for the US carrier. BLOOMBERG