bond market

OLAM’S SUSTAINABLE BOND ISSUE RAISES QUESTIONS

Olam International has raised more money riding the current trend of using ‘Sustainable Bonds’. The company issued JPY5.5 bn (USD $50m) over 5 years, which is considered medium term.

Sustainable Bonds are so-called, because the funds must be linked to a number of accepted sustainable actions. A company is incentivized to use these financial instruments which target sustainable causes because they pay lower rates of interest, meaning they can borrow the money more cheaply than alternative ways of raising finance.

Sustainable Bonds have some differences from ‘Green Bonds’ which are linked to a more narrow definition of environmental projects, while sustainable bonds can include social aspects as well.

For example, the following statement comes from the Green Bond Principles, which are a set of rules for issuing financial instruments.

The cornerstone of a Green Bond is the utilisation of the proceeds of the bond for eligible Green Projects, which should be appropriately described in the legal documentation of the security. All designated eligible Green Projects should provide clear environmental benefits, which will be assessed and, where feasible, quantified by the issuer – Green Bond Principles 2021

In Olam’s case, they have written in the note a summary of the purpose of funds, and refer to them as their Sustainability Performance Targets (SPT’s) Three outcomes are identified:

  1. 1. Prosperous Farmers and Food Systems,
  2. Thriving Communities, and
  3. Regeneration of the Living World.

However, I couldn’t find any detail on what projects would be financed. Businesses have a huge amount of flexibility with the use of funds, including using it as working capital or buying equipment. 

There has been an ever-increasing call from investors for greater transparency, disclosure and standardisation of Green Bonds, to ensure bond proceeds are correctly used and requirements of end investors are met.

PWC

I used some google kung fu to find out if google had indexed any documents related to these SPT’s on the domain olamgroup.com, but found nothing useful. 

The recommendations under the Green Bond Principles for reporting are woefully inadequate. Here’s what the guidance says about reporting the use of funds.

The annual report should include a list of the projects to which Green Bond proceeds have been allocated, as well as a brief description of the projects, the amounts allocated, and their expected impact. Where confidentiality agreements, competitive considerations, or a large number of underlying projects limit the amount of detail that can be made available, the GBP recommend that information is presented in generic terms or on an aggregated portfolio basis (e.g. percentage allocated to certain project categories). Green Bond Principles 2021

Adding to the concern, a paragraph toward the end of the press release seems to confirm that Olam can use the funds with tremendous discretion. What exactly does ‘general corporate purposes’ have to do with sustainability?

Here’s the relevant excerpt.

Proceeds from the Notes will be used by Olam and its subsidiaries (the “Group”) for working capital and general corporate purposes, including financing capital expenditure and potential acquisition opportunities which the Group may pursue in the future as part of its strategic objectives. Australia and New Zealand Banking Group acted as the Sole Manager, Sustainability Structuring Advisor and Swap dealer of the transaction. – Olam Press Release

Olam owes it to their investors, regardless of their regulatory obligation, to provide detailed plans of their use of funds and how they align to the sustainable objectives that they, themselves present.

PwC recommends more transparency to green bond investment.

“There has been an ever-increasing call from investors for greater transparency, disclosure and standardisation of Green Bonds, to ensure bond proceeds are correctly used and requirements of end investors are met. “

If they cannot provide the detail, then I cannot reconcile their heading ‘Olam continues to pioneer sustainable financing’ with their following statements which suggest use of funds will not be directly applied to sustainable initiatives.

Leave a Reply

cocoa vector

Newsletter

en_GBEnglish