Hillary Holmes

Interview with Hillary Holmes

Partner, Gibson Dunn & Crutcher www.gibsondunn.com

Preferred equity and ESG: crucial in capital raising for the energy industry

Innovative investment sources and the increasingly important role of Environmental, Social, and Governance (ESG) criteria in the energy industry are just some of the new elements companies must consider to navigate the energy transition better.

Video Video Interview Interview C ompanies shouldn't dismiss the importance of these elements, whether it is to access more flexible ways of financing or leverage the economic benefits that come with more inclusive policies in an increasingly ESG-driven business environment.

In interview with Energy Capital, Hillary Holmes, partner at Gibson Dunn & Crutcher, talked with us about the value of preferred equity in the energy industry and the increasing role of ESG in capital raising for the sector.

Preferred equity for energy companies: a flexible option During our conversation, Hillary underscored the evolving relevance of preferred equity for energy companies. In her words, this capital raising form is one "that

provides an option to match an energy company's need for developing capital in accordance to the investor's demand for predictable returns."

Accordingly, this is a very flexible product which is what makes it so attractive to capital raisers. Indeed, "preferred equity can be structured like debt, and at the same time, have the maturity to provide access to cash interest payments; particularly, with a no-call period and mandatory redemption."

On the investor's side, such "debt" increases over time similar to an interest rate; but in all cases, preferred equity will have restrictive covenants that considerably protect the investor.

Under these circumstances, what can we expect for preferred equity in the future? According to Hillary, we first need to look to the past. Historically, energy companies such as the ones focused on midstream activities used to issue preferred equity in registered offerings to a broad retail base of investors. These firms proceeded that way as the public equity markets were more open to energy companies.

In contrast, more recently, preferred equity is issued only to select institutions on a private basis. Therefore, in the future, "we can expect

to continue to see preferred equity used as a really valuable capital-raising tool."

The increasing role of ESG in capital raising for the energy industry Following investment concerns under the evolving energy transition scenario, we asked Hillary to share her perspective on the increasing role of ESG for capital raising in the energy industry.

As a specialist on the topic, Hillary noted that ESG "is absolutely critical to capital raising in the energy industry; particularly as the months, not even years, go by."

Just to provide a quick picture of these criteria's relevance, currently, "one out of every three dollars under professional management is tagged for sustainable related investments. Similarly, many investors are basically boycotting companies that don't have ESG friendly initiatives. Even beyond, the general investor sentiment is favoring companies that demonstrate a commitment to ESG." And not only can the industry access more capital, but it also may be able to access cheaper capital. In fact, "in the

future, energy companies that do not leverage ESG or write it off as unimportant are going to lose access to a growing pool of capital," Hillary added.

But simply integrating an ESG approach in both capital raising and your business strategy isn't enough. For ESG to become truly effective, companies should consider where they are in terms of their size and activities. "No one size fits all when it comes to an ESG strategy, and no one size fits all with respect to ESG," Hillary noted.

Another important topic to consider when talking about ESG strategies is the regulatory framework. "Right now, if you put one company's sustainability report next to another, it's not entirely apples to oranges; but it's certainly a red apple to a green apple just nothing looks exactly the same."

However, as regulations align, the industry can certainly expect to see some

standardized disclosure requirements over the next few years. Those who have implemented ESG strategies with anticipation will be the most benefited from this standardization.

Diversity in the energy sector Finally, Hillary talked with us about a crucial component within the current conversation surrounding the energy industry. As diverse and inclusive workplaces become more the rule than the extraordinary, companies in the sector should consider there's a strong business case for gender/ethnic/cultural diversity and corporate leadership.

As many studies show, the most diverse companies are now more likely than ever to outperform their less diverse peers on profitability. "So, the question is not one of altruism or doing the right thing,” Hillary continued, “it's also a question of what's good for business, and I think energy companies recognize this. Thus, most have proactively taken steps to increase diversity in their leadership and workforce."

Nevertheless, and while we've seen great advances in this area, there is much more work to be done; particularly for the energy sector, which has a long history with less diverse boards of directors under any industry globally.

There is still room for improvement and change; however, with the evolving conditions in the industry, and importantly, a more open attitude to discuss these topics, companies in the sector will be faced with better resources to address a transition that is not only focused on seeking cleaner ways to produce and deliver energy, but also on finding more human and people-centered strategies to conduct business through a holisticapproach for reliable investments.