German retail giant Otto Group has plans to be the first apparel, textiles and homewares retailer in the world to issue sustainability bonds. This week, the company — with 13.7 billion euros in annual sales and 51,800 staff across brands like Bonprix, Crate & Barrel and Manufactum — has revealed that a vetted financial framework for such an issue is in place and an actual bond issue can be expected shortly.
As opposed to purely “green bonds,” so-called sustainability bonds are issued to fund projects that have both environmental and social goals, things like fair pay and decent conditions.
“Sustainability has been part of our corporate strategy since the Eighties,” said Boris Jendruschewitz, who heads the Otto Group’s corporate finance department. “As such, it came very naturally to us, as a regular issuer of bonds in the capital markets, to think about setting up a ‘sustainable finance framework’ for future bond issues.”
Jendruschewitz told WWD that, due to compliance, the company cannot give an exact date for the bond issue. He will only say that, “new bond issues are possible in the next couple of months,” adding that Otto Group regularly issues bonds worth around 200 million to 300 million euros with no public credit rating. These are usually only available to investors in the European Union.
In the Otto Group’s case money raised from this bond issue will go toward projects in what the company is calling its new “Sustainable Investment Portfolio.” Presently there are only two projects in this portfolio, although more could be added later.
Firstly, the money raised will go towards purchasing more sustainable cotton from the Cotton made in Africa project, an initiative by a private foundation, Aid by Trade, founded by the head of the group, Michael Otto, in 2005. Last year, 91 percent of the cotton that the Otto Group used came from Cotton Made in Africa growers. Other large apparel companies, like Asos and s.Oliver, also work with cotton from the initiative.
Secondly, new funds will be used for the supply of furniture with Forest Stewardship Council certification. The latter is provided by an international group, headquartered in Bonn and Minneapolis, that promotes responsible forest management. In 2018, around 59 percent of the Otto Group’s furniture was certified by this council and the company wants to raise that to 100 percent by 2025.
Sustainability bonds are a fast-growing sector of the international market for more conscious investment. They differ from green bonds, which are traditionally defined as funding capital assets — for example, solar panels on a warehouse roof or a new fleet of electric delivery trucks. “The idea is that [a green bond] investment in a capital asset is one-off,” explained Monica Filkova, head of market intelligence for the Climate Bonds Initiative in London. “Ultimately we’re looking for significant climate benefits from the assets being financed.”
The sustainability bonds potentially being issued by the Otto Group clearly do not fit that definition and there are some arguments that this kind of funding is not quite as effective as that provided by “true” green bonds. As Climate Bonds Initiative chief executive officer Sean Kidney pointed out, sustainability bonds are often “catch-alls” for projects that don’t fit the definition of strictly green bonds where the money will be — as in this case — used for operating costs rather than capital assets. Despite this “it’s interesting and useful in pushing the idea that investments should be linked to positive social action,” Kidney noted.
“It is a valid point,” Jendruschewitz conceded. “When people think of green bonds, they tend to think of utilities like wind farms and solar panels. We are obviously not an energy company. So we looked at what was core to our business model — that is, buying and selling — and where we have the biggest impact. That’s clearly in the supply chain so it makes the most sense to focus on that.”
Also worth noting is that the market for sustainability bonds is opening up, growing far faster than that for green bonds. “While green bonds continue to make up the largest part of the market, attention is now shifting to a broader range of sustainable bonds and loans,” Bloomberg New Energy Finance analysts reported in January. The growth in green bonds slowed substantially in 2018, they wrote, “while sustainability-linked loans, surged 677 percent,” adding up to $36.4 billion. Ratings agency Moody’s also noted that a broader focus on sustainability will continue to drive growth in this part of the financial market.
Due to the growing popularity of this kind of financing among investors, various organizations, including the EU’s governing European Commission, are also working on better defining exactly what sustainability, social and ESG — environmental, social and governance — linked bonds and debts actually are.
A spokesperson from the Swiss-based International Capital Markets Association, a group that promotes and manages best practice standards in the securities market, confirmed that there are no other sustainability bonds from issuers in the textile sector as yet. Up until now, most organizations issuing these kinds of bonds have been banks, governments and energy companies.