An innovation in ESG finance is taking root. An essential part of the “S” of ESG is the commitment to stakeholders. Returning money to shareholders rather than investing in negative NPV projects is one such commitment. In an ESG buyback, a company allocates part of the outperformance of its share buyback to the funding of an ESG project, in line with its ESG values and commitments.
So, what is an outperformance? In the optimised agency buyback, the bank guarantees to the company, upfront, a fixed discount in the price of shares acquired versus the average VWAP (Volume Weighted Average Price) over the period. Let us assume a share buyback of $500 million and assume that the guaranteed discount is 100bps. Thus, the maximum cost to the company is $495 million, and the guaranteed outperformance will amount to $ 5 million. Ordinarily, this outperformance is returned to the company. In the context of an ESG share buyback, this outperformance is allocated in whole or in part to funding an ESG project.
Campari, one of the companies that embraced this innovation, described its green initiative and profit-sharing in a press release: “The Programme includes a contractually-agreed reward mechanism. An amount deriving from the outperformance in the purchase cost of the shares during the Programme will be allocated by Campari to an energy efficiency project, namely the installation of photovoltaic panels in Campari’s main plant located in Italy”.
A footnote defines “outperformance” as the difference between the purchase price and the average VWAP (volume-weighted average price) during the execution period.
Apart from Campari, BIC, Enel, and Terna have undertaken ESG share buybacks.
Given the large scale investment required for the shift to net zero, ESG share buybacks are an excellent way for companies to invest in net-zero/ESG programmes.