Do the Underwrite Thing

May 18, 2021

Social justice and sustainability bonds.

Every so often I get junk mail from this or that “green energy” company, telling me that if I switch from my mainstream electricity provider over to them, they’ll furnish my home with electricity made entirely from solar, wind and other renewable sources.

I like renewable energy as much as anyone, but those offers get pitched. It’s not just that their purportedly green electricity is more expensive and I’m a cheapskate (although it is, and I am). It’s that electricity, like money, is fungible, and there’s no test to prove where it comes from, or how it’s generated. I’m not comfortable paying extra for an improvement I can never be sure I’m actually getting.

All this comes to mind as I contemplate the phenomenon of sustainability bonds. This is a way for companies to borrow money by promising to use it for purposes that advance sustainability.

Sound vague? Well, as you look into it, the vagueness starts to seem like a feature, not a bug. Take this description from Pimco Investments:

Sustainability-linked bonds do not finance particular projects but rather finance the general functioning of an issuer that has explicit sustainability targets that are linked to the financing conditions of the bond.

Kellogg recently issued an eight-year sustainability bond of 300 million euros ($366 million). And what will it do with the money? According to a company statement:

An amount equal to the net proceeds will be used to finance or refinance projects within one or more of these categories: food security and sustainable food systems, renewable energy, energy efficiency, circular economy, environmentally sustainable management of living natural resources and land use, green buildings, and sustainable water and wastewater management.

That list sounds great, but I think the first seven words are notable. Buyers of these bonds will, in effect, be throwing their money into Kellogg’s cash coffers; we’ll need to take them at their word that they’ll spend “an amount equal” on these worthy goals.

Don’t get me wrong; it’s not like I think Kellogg’s is trying to pull a fast one here. I have no doubt that they’ll do what they say they will. But I’m having a hard time grasping the appeal of these bonds.

Is it to motivate companies to do the right thing? Let’s leave aside the question of whether helping the environment, alleviating food insecurity, etc., is something that all companies everywhere should be doing, just because it’s right. If a company is not already inclined to do these things, I doubt that they’ll change their minds just because it’s a little easier to borrow money for those purposes.

Is it to soothe the consciences of investors? That’s probably closer to the mark, but all they’re really getting for their money is a pledge. In most cases, that pledge amounts to “If you help us raise money, we won’t hurt the environment as much as we could – or as much as we’ve been doing.”

I guess I’m questioning the whole concept of explicitly underwriting corporate do-goodism. Socially responsible investing is a fine concept, but when corporations start virtue-signaling as a way to attract investments, caveat emptor.

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