Why Starbucks issued its first 'sustainability' bond
Slowly but surely, U.S. companies are waking up to the notion that bonds can be a useful financing mechanism for all manner of corporate sustainability projects.
In February, Apple shook up the market with a $1.5 billion green bond issue — the largest undertaken by any U.S. tech company — that will pay for a range of environmental initiatives.
More recently, Starbucks issued $500 million in debt that will be used for several purposes, including underwriting programs for farmers that adhere to the Coffee and Farmer Equity (C.A.F.E.) Practices, a set of guidelines Starbucks adopted roughly 15 years ago for growing and harvesting crops more sustainably.
In disclosing the offering, Starbucks CFO Scott Maw declared, "Issuing a bond focused on sustainable sourcing demonstrates that sustainability is not just an add-on, but an integral part of Starbucks including our strategy and finances."
Aside from the size of the offerings, there’s one big difference between them — the sorts of programs that will benefit from the money raised.
Apple is using its proceeds to fund solar and wind projects, energy storage installations, energy efficiency upgrades, water conservation measures, 'greener materials' research and recycling initiatives.
Apple’s debt falls under the category of green bonds, generally used to fund projects specifically meant to mitigate the negative effects of climate change. Some forecasts suggest that up to $1 trillion will be issued annually by 2020. Apple is using its proceeds to fund solar and wind projects, energy storage installations, energy efficiency upgrades, water conservation measures, "greener materials" research and recycling initiatives.
Starbucks has earmarked the money from its bond issue for projects that fall under the broader umbrella of corporate social responsibility (CSR) and sustainable agriculture initiatives, particularly those focused on ethical sourcing of coffee, said Drew Wolff, the vice president and treasurer of Starbucks responsible for arranging for the new debt.
The Starbucks’ senior notes offering was "significantly oversubscribed" and took about a month to pull together, he said. "We talked to a whole new set of investors that we didn’t know and hadn’t talked to before."
The bonds will finance resources at the company’s network of eight farmer support centers in Rwanda, Tanzania, Colombia, China, Costa Rica, Indonesia, Guatemala and Ethiopia, where communities are trained in sustainable crop growing and harvesting practices.
Starbucks also supports a $50 million fund for short-term and long-term loans, and it also owns a farm in Costa Rica. Among other things, it’s supporting a program to replace trees affected with the coffee rust fungus. "A little bit of money goes a long way in this program," Wolff said.
As of last year, the company said almost all of the 551 million pounds of coffee it purchased were "ethically" sourced according to the C.A.F.E. practices.
The bond proceeds also may be used to support some of Starbucks’ green retail initiatives, including certifications under the Leadership in Energy and Environmental Design (LEED) process, as well as CSR efforts such as training and placements for veterans and disadvantaged youth, Wolff said.
The Starbucks bonds were rated by consulting firm Sustainalytics, which also reviewed Apple’s bonds.
"Improving the efficiency and effectiveness of coffee farming practices helps to strengthen the overall sustainability of the coffee supply chain while advancing the socioeconomic conditions of coffee farmers," said Simon McMahon, executive president of advisory services for Sustainalytics, in a statement.
More people in this country are realizing that they can steer their investment dollars the same way that consumers can steer their purchases.
Wolff said he expects to know very quickly whether there will be an appetite for future Starbucks corporate sustainability or green bonds, an instrument he thinks will become more commonplace over the next several years. "More people in this country are realizing that they can steer their investment dollars the same way that consumers can steer their purchases," he said. "Over time, you should get better pricing for instruments like these."
Other U.S companies using green bonds include data center developers and operator Digital Realty Trust, which raised about $493 million from an issue back in June 2015. It allocated the money to supporting nine projects that have earned green building certifications. The rating systems that Digital Realty supports include LEED, the Building Research Establishment Environmental Assessment Methodology (BREEAM) and the Certified Energy Efficient Datacenter Award.
About $118 billion "labelled" green bonds are outstanding, according to data released in early July by the Climate Bonds Initiative. The larger universe of bonds related to financing low-carbon or carbon-resilient infrastructure projects is valued at close to $694 billion, the organization estimated. The country supporting the most "climate-aligned" bonds is China, followed by the United States, the United Kingdom and France.
"The growth in size and depth of both the climate aligned and labelled green bonds is a positive for potential investors looking to lift their green exposure post the COP21 at Paris," said Zoe Knight, managing director of the Climate Change Center of Excellence for financial services giant HSBC, commenting on the data. "It’s a sign of the scale and liquidity in the market and demonstrates the potential for future green investment."