Editor’s note: This article is part of a series on sustainability.

Over the past two or three decades, investors of all sorts have shaped the retail industry in myriad ways. 

Activist shareholders have advocated for mergers, sales, spinoffs, stock buybacks and asset sales. Private equity investors have taken over dozens of companies, bringing with them massive and sometimes fatal debt loads in leveraged buyouts. Lenders have backed retailers and their inventories, keeping scores of retailers liquid (until they don’t).

As climate change reaches crisis levels, can investors reshape retail to be more sustainable?

That is a loaded question without a single, unqualified answer. But as both the retail and finance industries become more focused on environmental and social practices, the relationship between operators and capital providers is as important as it has ever been. 

Sustainable debt instruments are growing in popularity and use, offering a means of financing major ESG initiatives as well as holding retailers and apparel brands to account on executing on their sustainability goals. Equity investors, meanwhile, add another potential layer of motivation, as ESG-focused funds grow in popularity and size, and become more sophisticated in analyzing industry practices. 

Together, the growing class of financiers have the potential to both fund change and demand it. Whether or not they will do so depends on their underlying motives, savvy, incentives and stamina in a world that still has a lot of uphill, expensive work to do, especially when it comes to cutting carbon emissions. 

‘Green’ debt

Last September, Walmart closed on its first-ever issue of “green bonds.” The retail giant plans to use the $2 billion in new capital to invest in renewable energy projects, energy-efficient facilities, sustainable transport such as electric and hybrid vehicles, and waste reduction and other investments intended to lessen the company’s environmental impact. 

Green bonds — and cousins like “social bonds” and “sustainability bonds” — are similar if not identical to traditional bonds in how they work. “The main distinguishing factor is the label that the issuer puts on it, which oftentimes comes with a commitment around how they’ll likely spend the proceeds,” said Matthew Kuchtyak, vice president and sustainable finance analyst with Moody’s. 

Often, “green” themed capital tracks with, or can be seen as an outgrowth of, broader sustainability programs at a company. 

To take the example of Walmart, the retailer has set numerous ESG-related targets, including procuring all of its electricity from renewable energy by 2035, cutting out a billion metric tons of carbon from its supply chain by 2030, and having zero emissions in its own operations by 2040.

“There’s a lot of potential reasons for issuing a sustainability-labeled instrument of some kind,” Kuchtyak said. For one, there’s investor demands for ESG bonds, including from pension funds and other institutional investors that have ESG-focused funds. 

Across industries, company issuance of ESG-themed bonds has quintupled since 2017, with Moody’s forecasting some $1 trillion in green, social, sustainability-themed bonds for 2022. 

“We have seen some anecdotal examples where the excess demand for sustainable bonds exceeds the supply in the market and has led to a moderate pricing benefit for some issuers,” Kuchtyak said. 

In other words, green bonds can be cheaper to pay back for some issuers, thanks to market demand for them. Which is one reason to go green in financing. 

Walmart is among the few large retailers to issue green bonds, according to Moody’s retail analyst Mickey Chadha. For now they are more common in the energy sector and others more directly engaged with climate issues. 

Putting your money where your mouth is

Along with green bonds, which are essentially typical bonds to fund ESG initiatives, there are sustainability-linked bonds and loans. These are debt capital instruments that often have interest rates and bond coupons tied to sustainability targets. Essentially, miss your targets and it could cost more to repay your debts. 

Source link


Comments are closed.