Google’s owner, Alphabet took advantage of sustained low interest rates to take on $10bn in debt last week including $5.75bn in sustainability focused issuances. A large number of companies have already issued environmental bonds however these socially sustainable issuances from Alphabet are about identifying and managing the business’ social impacts.
Alphabet have released a list of criteria where businesses must cater to at least one point to be eligible for investment from the proceeds of the bond issuance:
- Racial Equality
- Circular Economy and Design
- Affordable Housing
- Support for Small Businesses in the Wake of Covid-19
- Energy Efficiency
- Renewable Energy
- Green Buildings
- Clean Transport
Our news feed in 2020 has been ripe with unsettling social issues unearthed from deep rooted problems in our institutions and societies; with these issuances Alphabet have made a strong commitment to correcting these externalities in society. Alphabet’s move to issue the largest volume of Social Bonds in history may instigate a trend which other large technology companies may follow, especially as companies like Facebook face increased public scrutiny. Refinitiv reports that the global issuance of social bonds this year stood at $51.6 billion- 7 times that in the same period of 2019.
Socially focused financial products are gaining prominence in comparison to their environmental counterparts. For example, $30.4 billion in social bonds have been issued in 2020 in comparison to $16.70 billion issuances in 2019. On the day of the sale Ruth Parot, CFO of Alphabet stated that “sustainable bonds are an emerging asset class” and with this sale the firm hoped to “help develop this new market”. Since the wake of Covid-19 there have been increasing volumes of sustainably focused investments as the pandemic has altered society’s priorities by questioning their ability to create a cleaner and safer world. The crisis has highlighted the importance of rigorous supply chains and business strategies so companies can overcome challenges such as racial equality and renewable energy for a greener world. Gill Lofts, Head of Sustainable Finance at EY, said in a recent article that “Companies’ social purpose and their treatment of employees has never been more closely – or publicly – scrutinised, and firms’ actions today will shape their future”. This in turn will encourage investors and analysts to further prioritise conscious investing.
To ensure transparency for investors it is important to understand the impact returns through concise and clear reports. Alphabet offers this clarity through the release of annual reports which outline the expected impacts from the projects that have been funded by the bonds. On top of this the Google owner has released clear guidelines for investment in their sustainability bond framework. An example of Alphabet’s impact metric for affordable housing is to list the ‘Number of housing units constructed/preserved’. Within this metric it is paramount for Alphabet to measure those who have benefited from the investment, which in turn will strengthen the ‘social’ impact result. One of Alphabet’s commitments is to encourage racial equality by improving the black community’s access to education, however the company have not clarified how they will measure the impacts for this particular project. Investment in education is an important long term solution that can dilute racial inequality, helping all students to develop the knowledge and skills they need. If Alphabet can measure the impact that investment in education has provided, it will go a long way when determining the efficacy of this social bond issuance.
The classical expectation would be that a new bond issuance of this magnitude might have a negative effect on a company’s market capitalization, due to price pressure effects associated with contractions in liquidity. But although Google stocks saw a brief drop in price due to reduced ad-sales, these changes were short-lived confirming the company’s strong positioning. This issuance could even increase Google’s valuation in the long term as the company’s ethics and positive social impact may make them more attractive to investors in the coming months. As Alphabet’s ESG focused offering sets a precedent within global markets, competitors will be watching public response carefully, and weighing whether to follow suit.