To the investors who are pouring into environmentally friendly debt funds, the $100 million “green bond” sale for a paper mill in Michigan this month probably seemed like a good fit.
Graphic Packaging Holding Co. is using the proceeds to help finance a recycling facility at its sprawling factory in Kalamazoo, a project that promises to turn more than 500,000 tons of paper and cardboard waste annually into recycled food and beverage packaging.
What wasn’t mentioned in the 84-page prospectus for the bonds is that the same company has been cited repeatedly for sending foul odors wafting through the neighborhood surrounding the plant. Or that state regulators are looking into whether the plant is responsible for a toxic gas that may be connected to asthma in that predominately Black community.
The bond deal offers a window into the loose standards that still persist in the booming $3 trillion market for socially responsible financing. Much of the debt being sold to investors lacks third-party vetting of an issuer’s credentials on environmental, social or governance matters, the three pillars of the so-called ESG market. Graphic Packaging’s sale of self-identified “green bonds” for a recycling project amid its multiple odor citations show just how murky the definition of an environmentally-friendly bond is despite the growing hype.
“When you invest in bonds for a corporation you have to ask what is it that they are doing, and where are they doing it and how it is helping and hurting the communities that they’re in,” said Eric Glass, a portfolio manager for fixed income impact strategies at AllianceBernstein L.P. He said he did not purchase the bonds.
Concerns about lack of uniform standards and so-called greenwashing have been piling up in the corporate bond world too, as companies such as Philip Morris International Inc. turn to Wall Street to help burnish their environmental, social and governance credentials. Annual sales of such bonds are expected to hit a trillion dollars for the first time this year amid huge demand. Regulators across the world have been sounding the alarm over financial products that misrepresent or inflate companies’ sustainability claims.
Self-Designated
About half of the municipal green bonds sold in 2021 were self-designated, meaning the issuer called it green without some authority attesting that the financed projects are good for the planet. That’s down from more than 75% that were self-labeled in 2015, according to data compiled by Bloomberg. Such verification isn’t required to sell green bonds.
Graphic Packaging said it qualified for the green bond designation because it uses recycled paper to make its products and that the designation is “unrelated” to any odor issues, adding that it has taken measures to mitigate potential stench. A third-party odor study for the company as part of its agreement with regulators concluded that the mill didn’t generate nuisance odors. In a statement, the company said the city’s wastewater treatment plant or other facilities are a potential source of the problems.
“Graphic Packaging International’s plan to invest $600 million to build a new paperboard machine in Kalamazoo is at the heart of our company’s efforts to reduce our environmental impact and be a responsible corporate citizen,” the company said in a statement. “We are passionate about this issue and will continue to drive toward aggressive environmental goals, as part of our company’s commitment to be a good community partner and socially responsible corporate citizen.”
Related: Recycling Project Lures Package Giant to Muni Market: Joe Mysak
Proceeds of the deal will be used to help pay for a facility to dispose of solid waste from a new plant at the Kalamazoo factory that turns corrugated containers, post-consumer waste, box and manufacturing clippings and office waste into coated recycled board. According to company projections, the mill will use up to 300 million fewer gallons of water per year, reduce energy consumption by up to 18% and lower greenhouse gas emissions by up to 20%.
Odor Citations
The bonds, sold through the Michigan Strategic Fund, a state conduit agency, are tax-exempt, making it cheaper for the company to borrow than traditional corporate debt. The sale was managed by TD Securities Inc. and Truist Securities. Mike McCoy, a spokesperson for Truist, declined to comment. A representative from TD Securities didn’t respond to multiple emails and calls seeking comment.
Graphic Packaging has been cited eight times in the last decade for odor violations at the Kalamazoo mill, culminating in a 2019 enforcement action by the Michigan Department of Environment, Great Lakes and Energy. The enforcement action puts the company on watch and forces it to clean up the smells and refrain from future missteps. The company has taken steps such as increasing the frequency of its sludge removal and installing 16 monitors on site to track hydrogen sulfide levels.
Residents in the area -- where almost three-quarters are Black and about half live in poverty -- filed a class action lawsuit last year alleging the company’s operations are responsible for the putrid smells and the fallout in the community. Those conditions, they said, sometimes make it hard to breathe and at times difficult to go outside.
The company has sought to have the case dismissed on procedural grounds, arguing that the suit shouldn’t go forward until environmental regulators conclude their enforcement action. Lawyers for Graphic Packaging also said in court documents that it disputes that any “noxious odors” are coming from its facility and violating the law or its air permit.
Next week Michigan Department of Environment, Great Lakes and Energy is holding an online community meeting to talk about the air sampling efforts around the company.
The offering documents provided to potential bond buyers don’t specifically reference the eight odor violations or the enforcement action. They also don’t disclose that local, state and federal environmental authorities are investigating the prevalence of asthma around the factory and the possibility that its emissions are exacerbating breathing problems in the area.
Instead, the company refers investors to its quarterly financial filings, where it says some of its “current and former facilities are the subject of environmental investigations and remediations resulting from historic operations and the release of hazardous substances or other constituents.”
Green Principles
Though the bonds were designated as “green” the debt was not aligned to any industry association’s accepted green bond principles, according to bond documents.
“A portion of the project qualified as eligible for tax-exempt bond financing, as that portion of the project will fund an increase in the company’s capacity to recycle and thus reduce solid waste,” Christopher Cook, director of capital access programs for the Michigan Economic Development Corporation said in an emailed statement. “The air quality complaints are being addressed by the company and EGLE and are a separate matter from the bond issuance.”
The bonds, which mature in 40 years but have a tender in 2026, priced with a 4% coupon and a 1.7% yield. The debt is rated below investment grade by both Moody’s Investors Service and S&P Global Ratings carrying grades of Ba2 and BB respectively. Junk-rated municipal bonds have been in high demand this year, with investors flooding into funds that invest in the riskiest debt. Those bets have largely paid off with high-yield municipals returning about 7% since the start of 2021.
Lauren Kashmanian, a portfolio manager at Parametric Portfolio Associates, said that the “onus” is on investors to conduct a complete analysis that looks at all facets of a borrower’s ESG profile, not just the project the debt is funding.
“You really can’t rely on the label,” she said. “You really need to not only look at the project itself, but what is the organization or the issuer doing in the big picture when it comes to the environment and social concerns.”
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