Google parent Alphabet Inc has reported on use of proceeds from an issued $5.75 billion in sustainability linked bonds. It is now the largest corporate issuer of green or sustainability bonds.
The use of net proceeds from the sustainability bonds were allocated to eligible projects as defined by Alphabet’s Sustainability Bond Framework, and included projects the company and its subsidiaries may have started up to 24 months prior to the issuance date.
A preference for environmental issues in selecting eligible projects will help support GOOG’s aim of achieving net-zero emissions across all of its operations by 2030, including its consumer hardware products, and run entirely on carbon-free energy.
GOOG’s allocation of proceeds may have a strategic angle to them. Investing in energy efficiency and clean energy will go a long way in supporting the company’s data centres, the backbone of its fastest growing, albeit unprofitable, cloud services.
Alphabet (NMS:GOOG) published its Sustainability Bond Impact Report which showed how the company has successfully deployed the net proceeds of the $5.75 billion it raised by issuing sustainability bonds. Such bonds are usually fixed-income instruments that are asset-linked and supported by the strength of the issuer’s balance sheet used to finance projects.
A number of companies have issued green bonds which are directed solely to environmental uses, but Alphabet’s sustainability bonds support investment in both environmental and social initiatives.
Of the funds raised, 93% went to environmental issues, and only 7% went to social issues. In the environmental category, the big winners were energy efficiency (18% of the total), clean energy (31%) and green buildings (43%), with clean transportation, and circular economy and design receiving a combined 0.5%. Support for SMEs and COVID-19 response (3.3%) got the lion share of the social allocation, with 2.6% going to commitments to racial equity, and affordable housing (1.5%) receiving the rest.
Alphabet hopes use of proceeds will benefit net-zero commitments
Allocating nearly three-fourths of the proceeds from its sustainability bonds issued in 2020 towards green buildings and investing in clean energy will go a long way in helping GOOG reach its ambitious 2030 net zero target.
GOOG claimed this was the largest ever issuance by a corporate at the time (2020), and comprised $1 billion in 2025 notes (0.45% coupon), $2.25 billion in 2030 notes (1.1%) and $2.5 billion in 2050 notes (20.5%). The timing may have been fortuitous as well, as it precedes the recent and impending spate of increases in interest rates by central banks.
Alphabet sustainability bonds – use of proceeds
High quality sustainability framework may benefit future bond issues
GOOG’s allocation of proceeds from its sustainability bond issuance followed its well-defined sustainability framework. The company clearly defines its project selection criteria, and provides substantial information regarding the delineation and management of projects, which would result in a high rating for the framework.
GOOG also provides supporting documentation on its reasons and rationale for investing in clean energy, for example, rather than merely buying credits. This documentation will further lend credibility to the company’s sustainability borrowing credentials.
Strategic rationale behind sustainable project selection
Investing in clean energy and efficient data centres is probably as much of a strategic move, as it is to benefit GOOG’s ESG profile. The fastest growing business in the company’s portfolio is Google Cloud, and data centres are its backbone. However, Cloud trails similar offerings from its rivals Microsoft and Amazon in terms of market share, and continues to be loss-making, even though sales grew by over 40% in the first half of 2022.
Investing in green buildings at a time when remote working is on the rise may seem puzzling, but may also suggest GOOG’s long-term view on a possible reversal in this trend. It may also reflect the growing power of its employees who unionised in 2021 in an attempt to change corporate behaviour.
Tech companies are regarded as highly sustainable, yet a recent survey shows a disconnect between the importance placed on sustainability (which is reportedly high) and perceptions of organisational sustainability, especially among senior managers.
Overall, GOOG’s allocation of proceeds from its sustainability bonds is not surprising, but the relative lack of socially oriented projects is telling. Evolving focus on value chain sustainability that goes beyond Scope 3 emissions may help correct this imbalance.