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The Broader Implications of the Starbucks Sustainability Bond

Coffee farmer Martiniano Moreno examines coffee cherries on one of his plants in the Jaltenango region of Chiapas, Mexico. Photographed on November 16, 2015. (Joshua Trujillo, Starbucks)

Coffee farmer Martiniano Moreno examines coffee cherries on one of his plants in the Jaltenango region of Chiapas, Mexico. Photographed on November 16, 2015. (Joshua Trujillo, Starbucks)

A few weeks ago, Starbucks made an incredible announcement. They were going to have nitro cold brew in their cafes!! I think this definitively answers the Symposium question, is cold brew a category or craze? OK, OK.  I’m joking. The real earth-shaker is that Starbucks has issued the first US corporate bond for sustainability.

The amount that they raised is a staggering $500 million dollars, to be repaid to bond holders in 10 years at a rate of 2.45% per annum. When I first heard the announcement, my head spun as I jumped from some hot takes to realizing that this news required some additional reflection. My inner dialogue went something like this.

Starbucks issued bonds!?? $500 million is a lot of money. Only a company this large could raise that amount and get it that cheap. I wonder if it’s too late for me to buy a few bonds. Can Coffeelands issue some bonds to fund projects!? Wait, why did they have to leverage additional funds to pay for sustainability?

That last question is what has stayed with me as I have been thinking about the implications of the fact that the world’s largest coffee retailer needs to leverage additional funds in order to bolster their sustainability efforts.

Let’s look at the publicly available information that shows what the bond will fund:

  1. Green coffee purchases that are CAFÉ Practices certified
  2. Technical assistance for farmers and applied research
  3. Loans to farmers

This bond looks to address some of the greatest limitations that farmers face related to the challenges of sustainably produced coffee. Farmers lack access to technical assistance that would enable them to grow more coffee, more efficiently and in ways that minimize impact to the environment. The bond also provides access to finance, meeting the capital needs of a coffee producer for farm renovation, or to pay pickers during harvest. Yet it is the first item — green coffee purchases — that left me scratching my head a bit.

Here are a few reflections on this news:

  1. There is still room to innovate for financing sustainability projects and TA for farmers. Root Capital’s Willy Foote had a reaction to this — it was a great use of the capital markets to raise money. This isn’t Starbucks getting USAID or other donors to publicly finance a sustainability project. They went out and raised their own project money. This money comes extremely inexpensively to Starbucks — in the last 5 years, SBUX stock has increased in value by 320% — and paying back the bond in the timeframe should not be an issue. They should be able to reach an enormous amount of farmers with this fund. High fives and cheers to Starbucks for this. I can only hope others follow suit, or they find other ways to leverage their existing sustainability efforts.
  2. This is a smart investment. Starbucks recognizes that investing in farmers will pay off in the medium to long term. They just bet $500 million — actually $636 million if we include the 2.45% annual interest for 10 years — on this.  Farmers need an upgrade of their skills and they need access to newer technologies and knowledge that will allow them to produce coffee in the face of climate change and increasingly volatile prices. $500 million is a relatively small price to ensure a supply of quality coffee for the future.
  3. Sustainability is still an externality for the coffee sector. In economics, externalities are costs or benefits that affect a party who did not choose to incur that cost or benefit. We will continue to find ways to finance and pay for sustainability in the sector UNTIL everyone recognizes that paying for technical assistance, contributing to research, finding ways for farmers to access credit is part of the cost of doing business. Period.

How can we assume the cost of sustainability for the coffee sector as the cost of doing good business? Is it an issue of distance? The physical distance between most coffee consumers and producers? Or more of a conceptual distance in linking the abstractions of paying farmers a fair and just price and ensuring that farmers have the support and technical assistance they need in order to produce that magical elixir that accompanies us every day? Is it as easy as setting aside 10 cents a cup? Do we need to get an industry-wide consensus on how to make this change? I’ll let the bright minds at the Sustainable Coffee Challenge help us with these questions.

In the end, the SBUX sustainability bond, which focuses on investments on the farmer side of the supply chain, is an incredibly innovative move, and it brings some balance to last year’s wave of news of investment on the retail side. However, the challenge will be to invest this money in such a way that it not only strengthens Starbucks’ supply chain, but also creates capacity locally for farmers to receive technical assistance and access to new varieties.

Farmers need to know how to improve their soil and manage their water resources. Farmers need to be more entrepreneurial and to need to approach issues on the farm with a problem solving approach, rather than giving out recipes for fertilizer mixes and insecticides/pesticides. Anything less may result in a shortage of nitro cold brew in the not too distant future.