How Starbucks brewed a stronger sustainability bond
The first corporate-issued sustainability bond was spun from the question Starbucks Chairman Howard Schultz usually poses at the coffee company's investor meetings: "What's the role and responsibility of a for-profit, publicly traded company?"
It's an unusual question in an investor universe that's laser-focused on short-term financial performance and shareholder returns.
"He doesn't give you the answer," Starbucks Vice President Treasurer Drew Wolff told GreenBiz.
But when a company has ambitious long-term sustainability goals, it pays to plan strategically for the health of the communities and natural resources from which it sources its coffee. In May of 2016, Starbucks issued a $495.6 million sustainability bond, about one month after Wolff began his role.
"I knew a lot about green bonds [debts issued to investors by companies in order to fund environmental projects], just where the use of proceeds goes towards renewable energy and carbon-reducing projects," said Wolff. "So we kind of created this new category called a sustainability bond that has elements that a green bond would have."
While green bonds solely apply to projects that advance energy efficiency, renewable energy, climate change mitigation and other areas, sustainability bonds have a broader brush stroke.
Starbucks is the fourth-largest coffee roaster (PDF) by volume, responsible for 3 percent of global coffee sourcing, wrote Sustainalytics in its second opinion on the issuance. Because of its influence in the coffee supply chain, the roaster wants to "build a future with farmers," protecting coffee suppliers against child labor, wage and health and safety violations, as well as working to combat the environmental risks of coffee farms, such as water inefficiency, soil degradation and deforestation.
As of May, Starbucks had allocated just over $489 million (PDF) towards purchasing beans from farmers practicing its Coffee and Farmer Equity (C.A.F.E) standards; $3.8 million for development and operating costs for farmer support centers, agronomy research and development centers; and $2.8 million for financing smallholder loans through the company's global farmer fund that lends at a low interest rate. One hundred percent of the proceeds go to eligible sustainability projects.
Customer demand for transparency is one force driving brands such as Starbucks to innovate along with market shifts towards ethically sourced commodities.
"I think the biggest thing driving the demand [is] the millennial generation is realizing they can steer their investment dollars just like they do their consumer spend," said Wolff, and that movement is providing fuel for the recent green bond boom.
According to the International Chamber of Commerce, as investors began to diversify their portfolios away from climate risk, green bond issuance nearly doubled to $95.6 billion in 2016. For example, in February 2016 (right before Starbucks' issuance), Apple launched $1.5 billion in green bonds for renewable energy, energy efficiency and circular economy projects.
"2016 will be an inflection point year for the growth of industry investing," said Wolff.
The social bond and sustainability bond market "could well eclipse" green bonds in coming years, Suzanne Buchta, managing director of green bonds at Bank of America Merrill Lynch, wrote in Euromoney last year: "Sustainability bonds allow issuers to use the proceeds for both environmental and social projects — a hybrid of a green bond and a social bond."
Overall outlook has been bright for impact-minded bonds: Moody's found that global green bond issuance totaled $32.7 billion in the third quarter. Total green bond volumes for the first nine months of the year hit $49.5 billion, a nearly 50 percent increase of issuance during the same time period of 2016. Full-year issuance is expected to exceed $120 billion this year.
And in June, the International Capital Market Association, which wrote the original standards for green bonds, released standalone guidance for hybrid sustainability bonds.
Evangelizing the effort
While corporate sustainability bonds provide an essential source of financing for smallholder agriculture companies that want to stay true to their roots, they also give a jolt of reputational and strategic benefits to their issuers — and, Wolff said, that's starting to stand out among corporate sustainability and financial officers.
"I've probably had 15 calls with other treasurers really interested in doing something like this," he said. "Usually, the hurdle they're worried about is getting people internally to actually do the projects. And produce in a way that they can be confident in standing up to investors ... And to that, I say, 'Look, you're out selling bonds. And you're competing with other companies to get your bonds issued. Over time, it's really going to matter."
One common concern is whether issuing a sustainability bond is worth the extra work and expense, as well as whether the company will expose itself to risk if it is unable to fulfill the sustainability goals it has set. Wolff feels that hiring a rating or independent verification firm (in Starbucks' case, provided by Deloitte & Touche) was worth it.
"I think we'll see it pick up and it will be supply-driven," he said. "We need more supply for people, on the investment side, to be more interested." At the same time, if money starts to pool towards sustainability investing, transparency and reporting, there will be more supply. "So it's an upward cycle and trajectory."
Other benefits, he mentioned, of issuing a sustainability bond are improving cross-departmental communication and increasing positive visibility.
The attention gives Starbucks a chance to tell its story and connect with investors "that also have equity funds that would be interested in Starbucks' stock."
In March, Starbucks issued its first global yen second sustainability bond in Japan, valued at about $770 million (85 billion Japanese yen). Like the original bond, it will use the net proceeds from the offering to bolster sustainability and ethical sourcing programs.
There are risk management benefits to issuing bonds in a different currency.
"If you have a bond and denominate it to yen, and you have equity and denominate it to yen, they're kind of natural balance sheet hedges," said Wolff.
The Japanese green bond market is also more developed than that of the U.S. — as well as hungry for U.S. companies to issue in the country — with many investors in the sustainability bond mainstream names without "ESG" (environmental, social and governance) in their title or marketing.
"The Japanese public is a lot farther along in how they view sustainability," said Wolff. "And it's also demographics. It's a much larger fixed-income market, older population, but they are demanding that their pension funds and other things are invested responsibly."
Asked whether the U.S. federal government's anti-climate stance is dampening domestic demand for green finance, Wolff believes that corporations are more responsive to what their customers want.
"I don't think it will impact [green bond issuance] at all," he said. "I think it's really a function of where the consumer is at … and they just need to know there's a way to influence this, not just through where and what you buy and how you live, but also where you invest your retirement savings."
And that growing demand will justify the extra expense for developing, verifying and issuing a sustainability or green bond.
"At the end of the day, if investors want it, everything follows the money. The bond market is about 10 times the size of the stock market," even though the green bond market is still young among the roughly $1.3 trillion of bonds issued in the U.S. per year.
Although he urged against over-regulation in the nascent green bond genre, Wolff encouraged third-party ratings firms to strengthen their standards to help companies who want to take this step.
"What we have right now, just the traditional bond space, is a duopoly between Standard & Poor's and Moodys," he said. "We don't want that in the green bond space. We want many firms rating green bonds and having some competition for that and really having performance and the quality of their analysts drive who gets the ratings."
He emphasized that the green bond market should be competitive and self-regulating: "You don't need to put additional restrictions on it."