Now that I have your attention, you may be disappointed to know that I’m referring to another s-word: “sustainability”. It’s surely one of the big governance words of 2017. Investors are pressuring companies to do and say more about it. Organizations are developing standards – sometimes inconsistent ones – by which to measure companies’ performance in it. And companies are dealing with it in a growing variety of ways, including through investor engagement and disclosure.
Being a governance and disclosure nerd, I’ve given lots of thought to sustainability in both contexts. Lately, I’ve come up with two thoughts about it.
We need a better definition of sustainability. To some, it has meant ESG, an alphabet-soup term referring to environmental, social and governance – although lately the “G” has been dropped in favor of E&S only. To others, it means addressing climate change. Some say it refers to how companies treat their “human capital” (BTW – I really can’t stand the term). And still others think it means the way in which companies address the needs of the communities in which they operate.
In other words, like the line in Alice in Wonderland, “it means just what I choose it to mean”.
It seems to me that we need to define “sustainability” so that it means the same thing to (almost) everyone. My preference would be to encompass all of the above by referring to that which is needed to enable an entity to “sustain” itself – to survive and hopefully prosper – over the long term. And by long-term, I mean the long term – not just two or three or even five years, but a period during which things can happen that we cannot necessarily predict today.
This brings me to my second thought (I’ve probably used up my quota of thoughts for the next year or two). Specifically, the buzz about sustainability seems to be limited to equity investments and equity investors. Sustainability has been discussed largely in the contexts of shareholder proposals (which can only be submitted by equity holders) and investor voting policies to “force” boards to address sustainability (which can only be brought to bear by equity holders). While these may be valid contexts, I’m increasingly surprised that I’ve heard virtually nothing about sustainability in the context of bonds, be they municipals or corporate.
This is as good a place as any to acknowledge that my thinking on this topic has been inspired and supported by my friend Jeremy Horelick of AllianceBernstein and his colleague, Eric Glass.
Why bonds? Well, first of all, if you’re interested in the long term, bonds are the place to go. Eric Glass advises that “[v]irtually all bonds issued in the municipal market with maturities greater than 10 years come with a 10-year call option to be triggered at the discretion of the issuer”. (Eric also informs me that muni market issuers have one – but only one – additional opportunity to refund their debt within that 10-year time frame. For example, if a city issues general obligation bonds today and next year interest rates have fallen 100 basis points, the city will have one (and only one) opportunity to refinance the bonds to lock in the lower rate. Of course, it will have to choose wisely, as it will get only one bite at the apple – and would leave a lot of money on the table if rates were to fall an additional 100 basis points over the subsequent year.) In other words, aside from the one-time refunding opportunity, even if interest rates decline to make a call desirable, the bonds cannot be redeemed for 10 years. That’s far more “long-term” than what we’re accustomed to. Of course, if interest rates do not decline, or for the occasional 25- or 30-year bond that is not callable, the term is far longer.
In addition, Eric points out (rightly, in my view) that the proceeds from muni bonds are more likely than those from corporate bonds to be used for “sustainable” purposes – e.g., infrastructure, pollution control, green-friendly power plants, and so on.
The corporate bond world may not be as sustainability-friendly as that of muni bonds, in terms of both maturities and use of proceeds, but even there Eric points out that “in the corporate investment grade space, the vast majority of issues come to market as bullets with a three-month make-whole call prior to stated maturity”. In other words, they’re out there for a long time as well.
So it seems to me that investors who say they are interested in sustainability – almost regardless of how it is defined – might literally put their money where their mouths are by looking into bonds, particularly longer-term bonds, to achieve their goals. And perhaps governance and disclosure nerds like me should focus more on them as well and not limit the discussion of sustainability to corporate equities.