Green social and sustainability bonds: the strategy of Cassa Depositi e Prestiti

The origins

Recently, Cassa Depositi e Prestiti (“CDP”), the National Promotional Institution encharged to foster the growth of the Italian economy and to invest in the competitiviness of the country, has launched the Covid-19 Social Response Bond.

The purpose of the issuance of financial instruments such these is to underpin Italian companies hardly pounded by the crisis triggered with the outbreak of coronavirus.

First issued by the World Bank in order to finance projects of economic development and environmental protection, especially in countries belonging to Third-World, now sustainable bonds are quite common amid supranational institutions, corporate bodies and municipal authorities.

CDP confirms this trend, hightlighting the increasing importance of the economic, social and environmental impact in a process of investment assessment.

The idea of sustainability is enshrined in CDP’s bylaws and in the Code of Ethics, but is broadly declared in the Corporate Governance and Responsible Investment Principles. The Commitment to sustainability is also driven by United Nations Sustainable Development Goals (UN SDGs) and by the International Capital Market Association (“ICMA”) Sustainability Bond Guidelines (“SBG“).

Inspirated by the SBG Code, Cassa Depositi e Prestiti has “shaped” its Green Social and Sustainability Bond Framework. The proceeds of any CDP Green, Social and Sustainability bonds’ issuance will be used to fund either loans, project finance, equity investments or other tools which respect the eligible criteria, aiming at supporting the achievement of the United Nations Sustainable Development Goals.

The types of bonds

According to Green Social and Sustainability Bond Framework, CDP can issue three categories of bonds:

• Social Bonds: the proceeds of the issuance will be used to finance new or existing social eligible loans or projects

• Green Bonds: the money gathered with this kind of bonds finance new or existing green eligible loans or projects

• Sustainability Bonds: these instruments are deployed to finance new or existing social and green eligible loans or projects

Issuance’s stages

Each issuance follows a well-defined process:

• Use of proceeds

• Process for Project Evaluation and Selection

• Management of proceeds

• Reporting

Use of proceeds

The amount of proceeds from the issuance will be used to finance ore re-finance loans or projects which fulfill the eligibility criteria, namely which fall in the following categories:

• Infrastructures and Development of cities: usually, the projects look at people living in distressed areas, in areas economically developing or hit by natural catastrophes in order to improve the living conditions for the entire population;

• Education: the proceeds derived from the issuance of bonds need to fund projects to encourage access to education for disadvantaged sections of the population, for instance providing facilities, scholarships and grants. Fulfill the requirements also the projects which aim to improve education infrastructures and boost a successfull integration of disadvantaged people in the education system;

• Small and medium enterprises financing: the proceeds are addressed to the small and medium enterprises in order to promote their growth and to encourage an international expansion. Indirectly, the purpose of this instruments is also to support the Italian employment;

• Social Housing: these projects increase the access to social housing, helping people who live in social and economic difficulties, especially the ones without adequate housing;

• Energy and Environmental Sustainability: the proceeds derived from the issuance of these bonds will be deployed to promote energy and environmental sustainability, contributing to foster energy transition, generation of energy from renewables sources and decarbonisation.

The proceeds cannot be used to finance activities of several sectors, such as tobacco industries, extraction activities of natural gas, crude oil and other products deriving from oil refining, nuclear power generation, spirits’ industries, weapons and explosives’ companies, gambling and betting activities.

The process for evaluation and selection

The choice of the projects to be funded will be conducted by The Green, Social and Sustainability Bond Working Group, which is composed of representatives from CDP’s different departments (Finance department; Relevant Business departments; Investor Relation department; Sustainability department).

Each department is encharged to propose a portfolio of loans and projects to be considered as eligible to be funded by a Green Social and Sustainability bonds’ issuance; the second phase foresees a deep analysis for the approval of the financing. The process is carried out by the Green, Social and Sustainability Bond Working Group, which evaluate each proposed selected portfolio which meets the eligibility criteria. During the third and last stage the Green, Social and Sustainability Bond Working Group take the final decision financing or rejecting the project.

Management of proceeds

After the allocation of the proceeds of the bond issuance to eligible projects, may occur that a project or a loan would be no longer eligible; in this case, CDP uses the funds to finance other projects or loans assessed as eligible and compliant with the Green Social and Sustainability Bond Framework. The Working Group will ensure also an accurate allocation of proceeds and the review of the investments that will be made and of the disbursement of the money collected through the bond issuance.

Reporting

The last stage of the process entails a duty of reporting for CDP. In particular, CDP will draft a report on its Green, Social and Sustainability Bonds, which will include the description of the eligible loans or projects funded through the proceeds raised from the Green, Social and Sustainability Bond issuance and their social and environmental impacts, based on some impact indicators. The CDP report includes the total amount of proceeds allocated per eligible categories, loans or projects, the allocation per region and economic sector of activity, and the eventual amount of proceeds unallocated.

The report main function is to provide information to the bondholders; for this reason, the document will be made available on CDP’s website. The Bond Report will be published within one year from the date of the issuance of each Green, Social and Sustainability Bond and annually thereafter, at least until the full allocation of the proceeds.

Cassa Depositi e Prestiti appoints also an external authority and an independent auditor to assess the alignment of the Green Social and Sustainability Bond Framework with the International Capital Market Authority Guidelines and to monitor the respect of the eligibility criteria for the projects.