Food processing conglomerate Archer Daniels Midland announced its plan to issue its first sustainable bond earlier this year, making it one of the latest in a growing number of companies that are reexamining how they do business and issuing impact bonds to meet their ESG (environmental, social, and governance) goals.
As one of the largest agricultural companies in the world, with revenues of more than $85 billion, ADM encompasses a wide variety of businesses, with such items as food, feed, alcohol, cosmetics, and paint in its ambit. The Chicago-based food processing and commodities trading giant’s business spans 200 countries; it operates over 400 crop procurement facilities and 270 food processing plants.
The company agreed to issue $750 million in aggregate principal amount of 2.900% notes due 2032. The proceeds from these offerings are earmarked for both environmental and social programs.
Corporate impact bonds, which include green, social, sustainable, and sustainability-linked bonds, are growing in popularity.
“We’re seeing significant increases over the last few years as people have been issuing these bonds due to increased demand from investors,” said Anthony Belcher, vice president of sustainable finance data at ICE (Intercontinental Exchange).
During the first quarter of 2022, entities issued around $200 billion worth of impact bonds. That’s down from $250 billion in the first quarter of 2021—reflecting lower bond issuance in general, partially as a result of the Ukraine conflict—but a significant increase from $70 billion issued in 2020 and $45 billion in 2019.
ADM’s sustainability agenda
Under its Strive 35 plan, unveiled in 2020, ADM aims to reduce absolute greenhouse gas emissions by 25%, energy intensity by 15%, water intensity by 10%, and the amount of waste headed for landfills by 90%, all by 2035, according to Alison Taylor, chief sustainability officer at ADM.
“The sustainable bond is one tool in our tool chest that helps us along the journey toward achieving our Strive 35 goals,” Taylor said in an email.
The company plans to use its offering’s net proceeds to finance or refinance initiatives that meet criteria in its sustainable financing framework, such as projects related to sustainable animal husbandry, sustainable agriculture, and green buildings, as well as programs related to socioeconomic advancement and empowerment, ADM said in a statement.
Its goals also include developing a global plan to improve community well-being in water-stressed areas by 2025 and being deforestation-free by 2030.
”It will be against the achievement of these goals, along with others, that the success of our sustainability activities will ultimately be measured,” Taylor noted.
ADM is not alone in seeing impact bonds as a part of its broader ESG mandate.
A survey by BofA Global Research found that about 92% of its clients say that they incorporate net zero into their decision-making.
“That’s up dramatically from two years ago,” said Andrew Karp, head of ESG advisory and financing solutions at Bank of America.
In 2019 around 16% of the world’s GDP was covered by a net-zero commitment; today it’s about 90%, said Karp, citing BofA Global Research.
Global growth
Sustainable bonds have grown over the past couple of years across the globe, increasing from $65 billion in 2019 to $175 billion in 2020, Karp noted. Their size is still dwarfed by green bonds; about $500 billion worth were issued last year. The growth in sustainable bonds mirrors the increase in social bonds: $23 billion in 2019 compared with $190 billion in 2021.
“If you look at how climate transition needs to occur, the focus is now on a just transition where we’re not leaving the emerging areas behind,” Karp said. “In order for it to work properly, there has to be an important social element, and I think that’s likely to be an ongoing trend.”
Of the four main types of impact bonds—the green, social, and sustainable variety are also referred to as use-of-proceeds bonds, and proceeds from their issuance must be used for specific projects. The fourth category, sustainability-linked, provides more flexibility when it comes to the use of proceeds.
In the U.S., impact bonds have, for the most part, been issued by corporations, according to ICE data. Last year, for the first time, 21 government impact securities were issued, totaling $500 million, compared with 157 corporate impact securities totaling over $69 billion. In the first quarter of 2022, corporations issued a total of 36 impact securities, worth more than $16 billion, while no domestic government impact bonds have been issued.
The number of so-called sustainability-linked bonds issued is growing at a faster pace than other impact bonds; as noted earlier, the sustainability-linked also give companies more leeway in the use of proceeds.
The global market has grown from under $10 billion in 2020 to about $100 billion in 2021. In the first quarter of 2022, about $30 billion in sustainability-linked bonds were issued, Karp said.
While green bonds make up about 55% of the total market, sustainability-linked bonds are growing far more substantially than green or social bonds, said Adam Phillips, head of Americas ESG research at Citi.
“Where we’re seeing the most growth isn’t sustainable bonds by themselves, but [sustainability]-linked bonds,” Phillips noted. “We’re seeing just a three-year compound annual growth rate [CAGR] of 100% issuance growth.”
Two drivers for growth in this sector include the European Union’s Sustainable Finance Disclosure Regulation and Taxonomy Regulation moving forward, as well as the U.S. Securities and Exchange Commission’s recent proposal on climate disclosures, Phillips said.
“What’s interesting is if you look within the SEC proposal, they made special mention of [sustainability]-linked notes, bonds, loans relative to KPIs [key performance indicators],” he added.
While the total number of corporate impact bonds issued globally has been greater than that of government or agency bonds issued since 2015, these figures haven’t correlated with the largest total dollar amounts issued by the private and public sector. In 2020 and 2021, the total dollar amount issued by governments and agencies has been greater than that of corporate impact bond issues.
As ADM works toward reaching its ESG goals, the company is keeping its options open. While it doesn’t have a set schedule for future offerings, it may reevaluate its use of proceeds and KPI-linked financing structures, Taylor said.
“ADM is very excited about playing a role in the development and maturation of the ESG financing market,” she noted.
This story is part of The Path to Zero, a special series exploring how business can lead the fight against climate change.
