The Chicago Council on Global Affairs is pleased to present the 2017 Next Generation Delegates blog series. This year’s Delegation was comprised of 20 outstanding students from universities across the United States and around the world studying agriculture, food, and related disciplines. We were thrilled to feature these emerging leaders at the Global Food Security Symposium 2017, and look forward to sharing the exciting work of this extraordinary group.
By Caitlin Colegrove, MA candidate, International Trade and Business, Tufts University, and 2017 Next Generation Delegate
Many actors are increasingly calling on the corporate sector to play a larger role in solving the challenges of global food security. During the “Unleashing the Power of the Private Sector” panel at Chicago Council on Global Affairs’ 2017 Global Food Security Symposium, Jason Clay offered the insight that companies are often better equipped than governments to address food security challenges at the planetary level. While there is a consensus that the private sector can and must play a larger role in combatting food security, questions linger about what this role should look like and how the costs of this work should be covered. As companies step up to play a larger part in this issue, their ability to internally finance their social and environmental initiatives becomes a critical challenge. One tool which holds tremendous promise to address this need is use-of-proceeds designated bonds like green bonds, sustainability bonds, and social impact bonds.
As a graduate student, I have focused my studies on how businesses can improve the livelihoods of their suppliers, particularly farmers. As part of their corporate social responsibility and sustainable supply chain efforts, companies are increasingly considering social and environmental outcomes when making decisions. Many companies have established ethical sourcing initiatives aimed at improving the lives and livelihoods of their suppliers. On the environmental side, many companies are partnering with their suppliers on initiatives aimed at improving the sustainability and long-term resilience of their products’ supply chains.
These efforts are encouraging, but the future of these initiatives hinges on their financial sustainability. This concern becomes even more acute for publicly traded companies who need to answer to shareholders. Many food and retail companies are struggling to “get credit” from their customers for their sustainability work. This means that while ethical sourcing programs often increase the cost of an item, a consumer may or may not be willing to pay a higher price or premium—particularly if competitors have not implemented environmentally or socially responsible initiatives and are able to offer comparable products at lower prices.
The misalignment of time horizons creates further challenges. While many ethical sourcing investments may pay for themselves in the long run, companies are generally responsible for recovering costs along much shorter-term quarterly or annual reporting periods. In the absence of affordable alternative solutions, many companies are choosing to pare these ethical sourcing efforts back or cut certain initiatives all together.
In order bridge this financing gap, Starbucks issued a sustainability bond in May 2016 in the US (Starbucks then followed this up with a March 2017 issuance in Japan). These bonds provide a vehicle for Starbucks to issue debt at a low cost of capital while earmarking the proceeds for their ethical sourcing work linked with their CAFE Standards.
Sustainability bonds are one example of a category of corporate bonds whose proceeds must be spent on initiatives that advance environmental and social outcomes. There are three main categories of these bonds that have specific uses-of-proceeds: 1) green bonds, 2) sustainability bonds (sometimes referred to as social bonds), and 3) social impact bonds (social impact bonds are more commonly utilized in the non-profit and government sectors). The use of any of these names denotes the fact that the issuers of these bonds have had to pursue additional steps to meet the standards required for a bond to be labeled as such. Sustainability bonds hold particular promise for companies in the food and beverage sector. Because social and environmental impacts often intersect in agricultural supply chains, they provide the issuer with the flexibility to use the proceeds toward either social impact or environmental projects.
Green and sustainability bonds in particular offer a promising new avenue for debt financing for companies, supranational agencies, municipalities, and sovereigns. The market for these issuances is not yet to scale and as a result, there are several challenges:
- There is a tension between the drive for increasing standardization in the market and leaving enough flexibility to foster growth in the number of issuances. Investors are increasingly calling for more standardization to increase transparency around issuances. However, too much standardization and requirements that are too stringent are likely to drive away prospective issuers. Current standards are trying to strike a balance between these dual needs for standardization and flexibility.
- Sustainability bonds have been much slower to be adopted than green bonds. This is partly because they are simply less established. However, they also face a challenge in that social impact projects are often more challenging to define and report on than environmental projects.
- Green bond issuances in particular exhibit a great deal of heterogeneity. There needs to be more work done around defining eligible ‘shades of green’ in order to address concerns about greenwashing. Providing more clarity around the types of assets will offer a way for more investors to get involved in the space.
Despite these challenges, there is general consensus that the future of green and sustainability bonds is bright. In addition, the growth of green and sustainability bonds alongside the growth of corporate Environmental, Social, and Governance (ESG) ratings has been complimentary and mutually beneficial. As corporations increasingly look to play a part in solving global food security challenges, debt vehicles like green and sustainability bonds will play a key role in making these initiatives financially viable.
Read previous blogs by the 2017 Next Generation Delegates: