Being Intentional
The bi-weekly newsletter from Motive, covering ESG and Sustainability. In this edition: Maersk Green Financing, Rising Costs for Oil & Gas Producers, Hormel Food, and do people really want to change?
Sustainability is part of business strategy. The past week provided another clear example of just how important sustainability has become from a business perspective.
Last week Danish shipping behemoth, Maersk, floated a bond on the European Bond Market raising $US566 million. Issuing a bond isn’t particularly remarkable—debt financing is an efficient way for public companies to raise funds—but this bond issuance was different and important for the world.
Here’s why:
The money is being used to help finance the purchase of 8 new methanol-fueled ships.
The bond is part of Maersk’s Green Finance Framework, which is specifically targeted at funding the company's carbon neutrality initiatives.
But here’s the really remarkable part…
The company issued the bond with a 0.75% coupon—its lowest rate ever!
The deal was the most subscribed of the week in the European bond market. In fact, it was over-subscribed!
To recap: Maersk was able to raise money at a lower cost of capital to fund its transition to more sustainable shipping vessels in a move to decarbonize its shipping operations to appeal to a broader base of investors.
From the company’s CFO, Patrick Jany:
“With this green bond, we aim at diversifying our investor base by reaching out to new investors and increasing the transparency of our environmental, social, and corporate governance (ESG) ambitions and performance even further towards our stakeholders.”
There is no public company CFO that didn’t take notice of Maersk’s success. The economics are simply too powerful to be ignored. Once again, sustainability is part of business strategy.
Thanks for being a reader of Being Intentional. We are grateful for your ongoing support. If you find this newsletter interesting please consider sharing it.
What We Are Seeing
This will be our last note about the COP26 climate conference in Glasgow (we think!). But this is not a note to dissect the Glasgow Climate Pact, as the final agreement text is known. Rather, it is a note to all companies and asset managers with a simple message: be prepared for more engagement on climate and sustainability--from regulators, investors, consumers, and community stakeholders.
COP26 has wrapped up and the ever-plentiful post-mortems have been circulated (and more are still coming through). Whether you believe the Glasgow Climate Pact is a failure or a success depends largely on how you view the risks of climate change in relation to your views on the nature of national governments.
Having read through more than three dozen of the most widely circulated analyses and opinion pieces, one distinction stands clear to us. For those who approached COP26 as an opportunity to meaningfully address climate change, the Glasgow Climate Pact is, in all intents and purposes, a failure. Yet for those who approached COP26 as a practice in multilateral governance, the Glasgow Climate Pact is a clear success.
On the one hand, the agreement falls far short of limiting emissions within the IPCC-supported timeline, yet on the other hand, it succeeds in building common ground among nearly 200 nations of varying, and often competing, respective interests, cultures, contexts, and experiences. The Glasgow Climate Pact does very little to address climate change but a lot to justify continuing global cooperation and coordination. Bittersweet, we suppose.
In our media tracking, mentions of #COP26 or #GlasgowClimatePact have all but disappeared. The conference is over and the outcomes are not impactful enough to hold everyone’s attention. Yet we are also seeing the rise of new trending discussions tagged with #COP26Failure, #COPout, and #BlahBlahBlah (a reference to Greta Thunberg’s admonition of elected leaders’ empty promises and no action).
What we are seeing in these discussions are requests for guidance. People invested great urgency and activism into COP26 framing it as a last opportunity to avert the worst impacts of climate change, and the resulting Glasgow Climate Pact leaves them feeling abandoned and rudderless.
What we are seeing in response to these requests for guidance are calls to forget about multilateral organizations and elected leaders that have disappointed the climate movement time and time again, and instead to go straight to the levers of power and enact change directly. The levers of power being the markets.
All corporate sustainability and ESG teams should be preparing themselves for this shift. Consumers and investors want sustainability, soon they will be wanting more sustainability...and faster, and with more transparency and accountability. The activism and engagement tactics of the climate movement are going to help focus the attention of consumers and investors--on key issues and key targets--as well as generally super-charge the consumer sovereignty movement.
This all means more engaged stakeholders, more boycotts, protests, walk-outs, divestment campaigns, and shareholder activism. Robust sustainability programs, good ESG and CSR, and transparent and responsive engagement are the new currency in this market shift. While sustainability was once a marketing advantage it is quickly becoming a full-scale competitive advantage. The transition has already begun, and the perceived failure of COP26 is now accelerating it. Plan accordingly.
The Business of Sustainability
We like to say that sustainability is no longer a side project, it's business strategy (...we may have just said that in the previous section…). A recent article exploring the cost of capital of oil and gas projects provides a supporting case for this claim.
As reported in this Bloomberg article (Link), about ten years ago, the cost of capital for developing oil and gas projects was comparable to that of renewable energy projects--all around 8-10%. Yet today, oil and gas projects need to demonstrate returns on equity exceeding 20% while renewable energy projects only 3-5%.
This divergence in the cost of capital is significant and is reshaping the entire energy industry. As Will Hares, an analyst at Bloomberg Intelligence states:
“Oil companies are finding it increasingly difficult to raise financing amid rising ESG and sustainability concerns, while banks are under pressure from their own investors to reduce or eliminate fossil-fuel financing.”
All else aside, developing new oil and gas projects simply doesn’t make sense--the cost of capital is simply too high relative to the viable alternatives. It’s not about values, morals, or investing for future generations (although all of these are good and we support them!), it’s simply about basic economics--and the numbers no longer make sense.
Although today this transition is most obvious in the oil and gas sector, we expect to see these same pressures playing out across all industries in short order. The demand for ESG investment products and services has absolutely boomed over the last few years. ESG assets now total $35 trillion globally, up from $22.8 trillion in 2018, and are anticipated to exceed $50 trillion by 2025 (Link). This trend is also clear in consumer markets. A full 54% of growth in the consumer packaged goods market is derived from sustainability-marketed products and these products grew at 7.1X faster than products not marketed as being sustainable (Link). In short, people care about sustainability and they want their investments and purchases to reflect these values.
The transition afoot in the energy sector should serve as a cautionary tale to all others thinking ‘sustainability is just a trend’. Sustainability can no longer be approached as a side project, it must be engaged as business strategy.
CSR Spotlight
Nearly all companies--over 90% of all S&P 500 companies, impressively--publish an annual Corporate Sustainability Report. Varying release dates mean we get new reports every week! CSR Reports are an excellent way to see how companies think about themselves...and how they want to be thought of. We read all the CSR reports we can find and share one that we think serves as an example of best practices or as a cautionary tale.
One that stood out to us for positive reasons was from Hormel Foods (Link)
Hormel Foods is among the world’s largest food manufacturers with over 19,000 employees and products sold in 80 countries. We are familiar with Hormel from a few pizza toppings in our fridges and cans of chili from recent camping trips, but we were not familiar with how well developed their sustainability and responsibility programs were.
What we liked:
Transparent reporting. We felt we could trust what we were reading.
Third-party verified data. Knowing the data that supports this report was verified adds even more to our trust in this report and the sustainability processes at Hormel Foods.
Clearly Identified Short, Medium, and Long-term Goals: These mixed timelines show the company is not simply kicking the can down the road.
Goal-Specific Metrics: These metrics demonstrate the goals are more than just words and hopes. You manage what you measure.
Materiality: Nearly everything Hormel Foods is doing is clearly tied to a topic or area that the company can have a meaningful impact in or that can have a meaningful impact on the company.
What was missing:
Scope 3 Emissions: Hormel Foods is advancing meaningfully in emissions reduction and renewable energy use, but we couldn’t find much discussion--or action--regarding Scope 3 emissions. Companies are uniquely positioned to be able to address Scope 1, 2, & 3 emissions--leaving any of these off the table raises concerns.
An Actual Report: The Hormel Foods ‘report’ is actually a series of interlinked web pages. We understand that this makes it easier for the company to update certain sections as needed without having to reissue the entire report and it also allows them to track website visitors to see who is interested in what. But for the reader, it is a much less accessible format. It requires a suitable internet connection and it is so easy to miss entire sections or to get lost after a few clicks not knowing if you finished a section or the entire report. The option to download a .pdf version of the report would be great. Downloading a report also makes it easier for those of us who are interested in benchmarking performance year-over-year. Maybe a download option was there and we simply missed it...but we did spend a lot of time on the site...
What We Are Saying
The Headline Was Not The Story: (Link)
In this week’s blog:
A recent global survey reports “few people are willing to change their lifestyle to save the planet”–this is a misleading statement serving as a sensationalist headline.
The survey really shows that 1) people do not believe companies are committed to preserving the environment and the planet, 2) that a majority of individuals are taking actions to save the planet, and 3) many people want more guidance in doing so.
This is a great opportunity for companies to re-frame their corporate sustainability efforts and communications: Don’t speak of the great things you are doing (people don’t believe you anyway), rather speak of how what you are doing supports others in doing great things.