On Wednesday, PepsiCo (PEP 1.65%) issued a filing with the Securities and Exchange Commission that at first blush could be mistaken for a quite routine notification. The company announced its pricing on Monday, Oct. 7, of $1 billion in senior notes due in 2049, which collectively sport a coupon of 2.875%, payable semiannually. Like its peer consumer staples titans, PepsiCo is a frequent issuer of debt, which it uses for capital investments and other plain-vanilla purposes.
However, this newest debt offering is unique for PepsiCo in that it represents the organization's first "green bond." Proceeds will be used solely to fund sustainability initiatives under three major priorities: "Sustainable Plastics and Packaging," "Decarbonization of Operations and Supply Chain," and "Water Sustainability."
Of these priorities, which are aligned with U.N. Sustainable Development Goals or SDGs, the sustainable plastics and packaging effort seems the most ambitious. PepsiCo intends to reduce its virgin plastic manufacturing content by 35% by the year 2025. Funding from the green bonds will be allocated within this priority to "projects that purchase compostable, biodegradable and/or recyclable material for use in product packaging, and by investing in the development of packaging that includes bio-based PET bottles and compostable and biodegradable snacks flex films."
The company has appointed its first-ever chief sustainability officer to allocate the green investments across the three overarching priorities. Executive Simon Lowden will lead PepsiCo's Sustainability Office, which oversees global teams in sustainable plastic use and sustainable operations. The issuance of a green bond signals CEO Ramon Laguarta's commitment to improving PepsiCo's environmental, social, and governance (ESG) bona fides alongside the more traditional tasks of meeting financial benchmarks and investor expectations.
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The rationale for green debt
Does issuing debt for sustainability initiatives confer any special financial advantage to PepsiCo? I don't see evidence of any positive or negative impact from the particular flavor of this borrowing. The notes' term agreement, an exhibit to Wednesday's filing, reveals that PepsiCo's relatively attractive coupon rate represents a 92-basis-point spread over the prevailing long-term U.S. Treasury rate on the date of offering (Oct. 7). More than any other factor, this advantageous interest rate is a function of the organization's solid balance sheet and investment-grade rating; moreover, characteristics of the transaction are in line with other recent borrowings detailed in the notes to PepsiCo's most recent annual report.
Over time, however, the green bond can both achieve the desired ESG outcomes and provide meaningful (if difficult-to-quantify) financial benefits. PepsiCo undoubtedly hopes to attract a certain type of shareholder to the "PEP" symbol through this action. Typically, changes to a company's capital structure (i.e., its mix of debt and equity on its balance sheet) seek to optimize shareholder value and/or annual returns. For example, well-resourced public corporations regularly tap into borrowing capacity in order to buy back shares, pursue acquisitions, or invest in their supply chains, to name just a few uses of debt capital.
Altering a company's capital structure to invest in a greener footprint is still quite uncommon among multinational corporations; it's a use of leverage that makes quite a statement, as it can't be immediately traced to an outcome of increased net income or a higher ultimate value per share. Yet it's an action that undoubtedly appeals to investors who actively seek out corporations with high ESG scores. And the borrowing also serves as one of PepsiCo's innumerable efforts to present a more socially conscious image to current and prospective customers. Attracting a new -- and younger -- generation of sustainability-minded consumers is critical to shoring up PepsiCo's future revenue growth.
To conclude, while PepsiCo can't measure investment returns from the green bond proceeds using the same benchmarks as an investment in, say, a manufacturing plant, the project tucks in nicely with the "better" pillar in CEO Laguarta's "Faster, Stronger, Better" strategic framework, which I've discussed in detail here. Achieving a better environmental posture requires material investment; companies can't progress on lofty stated aspirations alone. I for one am intrigued to follow the qualitative returns from this green financing in the coming quarters.
